cheesey mike

Do ETNs Belong in Your Portfolio?

I have been dying to have someone explain the tax treatment difference between a commodities ETF and a comodities ETN, which might have some bearing on this issue. Last year, I owned DBC, and I received a 2007 K-1 limited partnership form as a result (adding a degree of complexity to my tax return). In addition to the interest income I received, I had to pay taxes on the unrealized gain in value of the position during the year as normal income even though I did not sell the position. This is a very tax inefficient investment (given the incredible run-up, I'm not complaining), and I would be very curious to know if an ETN that represents a similar commodity basket would be equally tax inefficient. If there is some tax benefit (i.e. you don't have to pay taxes on the gain until you sell the position), that would be a big plus for ETNs. However, I did some rudimentary comparisons of performance of various commodity ETFs and ETN's and found that the ETF's appeared to have significatly better performance histories.

Ironically, I have owned GLD position for several years, and never had to pay a dime in taxes for holding that position.