Vig, from Jeff Watson

February 26, 2010 |

I'm looking for some new/better ideas on how to calculate the vig in ETFs, versus the vig in futures, versus the vig in the physical.

Bill Rafter replies:

Not all ETFs are taxed identically. Specifically the inflation-averse would be warned that GLD is set up as a grantor trust and not as a 1940 Act fund. Profits in GLD are taxed as collectibles.

This points out that "structure matters". For example if you own an ETN (note) rather than an ETF (fund) you are subject to counterparty risk. Some people have chosen to gloss over the distinctions and refer to them all as ETPs (products), and that homogenizing tends to mask the counterparty risk. For example, LEH had issued a few ETNs whose owners are now waiting in line with all of LEH's other creditors. Barclays is the counterparty on INP (ETN representing India), which presumably would be okay. But why take the chance when you can buy EPI, the Wisdom Tree offering which is a true ETF?

How do you find these things out? Read the prospectus, something very few do anymore.

Nick White writes:

Deep and mysterious are the secrets that one can behold if they are willing to brave the legalese, break out pad and paper and delve into these sometimes fantastically structured products.

Rocky Humbert comments:

There were/are a whole load of those ETNs out there — additionally, the IRS issued a ruling about a year ago that changed the tax treatments for the currency ETNs. Currently, some of the narrower futures are under scrutiny by the IRS, and some foreign (unregulated) futures don't qualify for Section 1256 at all. Another example of the hazards of the ETFs are also the changing CFTC rules regarding position limits — which caused the UNG and USO to diverge from their NAV. At one point the UNG was trading at a 19% premium to NAV. If one is short the ETF, one cannot redeem the position, so there is no theoretical limit on how far the premium could go. In contrast, if you buy the ETF at a discount, you can always redeem it and close the arbitrage to the underlying. 


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