| Exchange Traded Funds (ETFs) represent a | | | | specific industries such as health care. |
| bundle of assets that look a lot like a mutual fund, | | | | Currency ETF |
| only they may be traded during the day just like | | | | Currency ETFs aren't funds at all but, rather, |
| ordinary stocks (mutual fund units may only be | | | | trusts or limited partnerships that pass income |
| redeemed at the end of the day). ETFs have | | | | and gains through to their investors. Accordingly, |
| gained a reputation as a low cost, tax efficient | | | | each owner of a Currency ETF takes into |
| alternative to mutual funds. The only problem with | | | | account his or her pro rata share of the ETF's |
| this perception is that it may not be accurate. | | | | income, gain, loss, deductions and other items for |
| ETFs that invest in currencies or commodities can | | | | the calendar year. If you are an investor in a |
| create bizarre tax ramifications to which the | | | | Currency ETF you will receive a K-1 for the year. |
| capital gains tax rate rules simply do not apply. | | | | This K-1 will itemize each specific type of income |
| This article will address the tax implications of | | | | and expense passed through to you, the investor. |
| investing in three forms of ETFs: Plain Vanilla | | | | The tax treatment of such income or gains |
| (bundles of company stocks), Currency and | | | | depends on the Fund's underlying positions, so you |
| Commodity ETFs. | | | | must read the prospectus to understand the tax |
| Plain Vanilla ETF | | | | treatment of such income, expense, gain or loss. |
| A Plain Vanilla ETF gives the investor a tiny piece | | | | Currency ETFs allow you to capitalize on the |
| of various companies that are held in the fund. | | | | strength of foreign currencies relative to the U.S. |
| Like an Index Mutual Fund a Plain Vanilla ETF is a | | | | dollar. Whenever a U.S. investor buys a currency |
| type of investment company which invests its | | | | ETF, they are automatically short the dollar in the |
| funds in stocks that mirror some particular | | | | corresponding currency. This type of strategy |
| market index, such as the S&P 500 or the | | | | allows you to hedge against weakness in the |
| NASDAQ 100. Plain Vanilla ETFs can be grouped | | | | dollar. Currency ETFs can be taxed in eight |
| into four basic categories: Broad-Based ETFs, | | | | different ways. Currency ETFs can be taxed as |
| Fixed Income ETFs, International ETFs and Sector | | | | long-term capital gains, short-term capital gains, |
| ETFs. Broad-Based ETFs follow specific indexes | | | | ordinary income, interest income, part capital gains |
| styles such as growth indexes, value indexes, | | | | part ordinary income, phantom interest (interest |
| small-cap, mid-cap and large- cap indexes. Fixed | | | | not received) and phantom ordinary income (mark |
| Income ETFs track indexes for corporate and | | | | to market gains for futures contracts). Currency |
| Treasury bonds. International ETFs track indexes | | | | ETFs can create bizarre tax treatment that even |
| for foreign countries as well as international | | | | your CPU would not understand. |
| regions (i.e. Asia). Sector ETFs track indexes for | | | | |