One of the curious things about ETNs is that they're not more popular.
Sometimes I wonder if individual investors even care about taxes. You see them investing in tax-inefficient mutual funds all the time. And even within the ETN space, the asset flows to-date belie a strong emphasis on tax issues.
Investors should care. The tax benefits of the ETNs are huge. As a shareholder, I care about the tax issues.
But look at the assets for the eight iPath ETNs:
These things are a success because of two products: 1) The Dow Jones-AIG Commodity ETN, which has $2.3 billion out of a total $3.6 billion in assets; and 2) the MSCI India ETN, which has $813 million.
That doesn't suggest a focus on tax to me. India isn't really tax-advantaged at all, and while much is made of the growth of DJP—now the biggest commodity ETF/ETN on the market—to my mind, its success is tied to the underlying index, not the tax-advantaged structure.
Consider competing indexes. The GSCI is tremendously overweight energy, and in particular oil, which due to contango wasn't a good bet until recently. Meanwhile, the DB Commodity Index—the underlying index for the PowerShares DB Commodity Index Fund (NYSEARCA:DBC)—isn't well-known by investors, and with only six commodities, may not offer enough diversification for investors. (I happen to very much like DBC, and particularly its roll strategy, but I don't think investors understand its benefits as well as they should.)
A better window into investors' thinking is offered by looking at the iPath S&P GSCI Commodity ETN (NYSEARCA:GSP) and the iShares GSCI Commodity Index ETF (NYSEARCA:GSG). Those two products track identical indexes and offer similar exposure. Of the two, GSG ... the ETF ... has more assets: $366 million vs. $229 million.
Similarly, the three currency ETNs provide very similar exposure to comparable CurrencyShares ETFs. But while the currency ETNs have a net $208 million in assets, the comparable CurrencyShares have $2.08 billion.
Investors should care about the tax issues. Some of these asset classes are woefully tax-inefficient, and the ETNs offer real benefits (for now).
But do investors actually think about taxes? Do they even understand the tax implications of currencies, commodities and bullion-based investors? Despite my best efforts (grin), I'm not so sure.
Written by Matthew Hougan