Exchange-traded notes to lose tax edge in House proposal

Short Term

The iPath S&P 500 VIX Short-Term Futures ETN is the largest VIX-tied exchange-traded note, with $1.17 billion under management, according to data compiled by Bloomberg.

Because the proposal would tax derivatives in a similar way to mutual funds, investors probably won’t stop buying the notes, said Dan Besse, managing director at Pacilio Wealth Management in Westport, Connecticut.

“I don’t think this proposed tax change would have a radical effect on the use of ETNs,” he said. “Although a lot of wealth managers, including us, are aware of tax ramifications, we’re trying to make the best and most suitable investments for our clients.”

Investors would adjust and shift money to other investments, K&L Gates’s Crowley said. That’s especially true because the proposal would apply only prospectively to investments made starting in 2014.

‘Some Dislocations’

“I see all of this as causing some dislocations in the short term, but ultimately people will get used to complying with the new rules,” he said. “It will undoubtedly cause some squawking in the near term.”

The market’s relatively small size means that most investors won’t be affected by tax changes, Lee said. The $17 billion in investor-owned ETNs amounts to less than 1 percent of the $1.93 trillion exchange-traded product market, according to a December report by BlackRock Inc., which promotes iPath notes.

“I think it would hurt more speculators and other types of investors who have a reliance on this, but the average Joe Schmo is not going to really notice any changes,” he said.

Bloomberg News

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