Alternatives: The Next Dimension in Asset Allocation

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ETFs have become so popular in part because of the tax efficiencies that they offer relative to traditional mutual funds. Due to the nuances of the creation / redemption mechanism, ETFs are generally able to give investors more control over their tax situation–instead of pinning them with capital gains obligations due to the activities of other investors.

Unfortunately, however, the tax treatment of exchange-traded products cannot be summed up simply as being more efficient than mutual funds. There are various complexities across the different product structures that impact the effective tax liabilities that will be incurred on gains. And there are also some nuances that impact how taxes on various ETP positions must be reported that are of major importance to some financial advisors.

As a general rule, gains and losses for a typical ETP are reported on Form 1099, but there are a number of ETPs that are structured as partnerships and as such, will issue a K-1. Exchange traded funds that utilize futures contracts, whether that be commodity, currency, or volatility, or any other product that is structured as a partnership will send out K-1s. As taxes are such an important part of investing, we outline the complete list of ETFs that issue a K-1 for anyone looking to avoid a more complex tax filing, or simply to educate those on who may be unaware of how their investment is treated from a tax perspective [see also The Ten Commandments of Commodity Investing].

What Is a K-1?

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There is a fair amount of confusion over what exactly a K-1 is and what receiving one of these statements means. A K-1 is a tax document used to report share of profits and losses from interests in limited partnerships. These documents become relevant because many exchange-traded products are technically structured as partnerships, meaning that investors are actually limited partners. Partnerships are typically not required to pay taxes directly, instead passing through those obligations to individual partners. They do that by sending a K-1 to partners each year detailing their interest in the operations of the partnership [see also Analyzing Five High Yielding Oil & Gas Pipeline Stocks].

Many investors wish to avoid K-1s primarily because of the inconvenience caused. Schedule K-1 tends to be one of the last documents provided to taxpayers, potentially delaying the timing of their filings. For advisors with hundreds of clients, the administrative burden associated with K-1s can be less-than-optimal. But it should also be noted that receipt of a K-1 generally means a taxable event–even if the related position has not been liquidated. In other words, securities that issue a K-1 may require investors to report and pay taxes on gains annually, even if the security has not been sold.

For some, K-1s are not a significant issue–simply a minor inconvenience. Others try to avoid these schedules at all costs, preferring to use exchange-traded products that can be reported on a Form 1099. Below, we break down the complete list of ETFs that issue a K-1 by their respective asset classes.

Commodity ETPs

Commodity ETPs make up the majority of the K-1 issuing space, as many of these products are structured as partnerships that utilize futures contracts to offer exposure. It should be noted that physically-backed ETPs such as (GLD A-) do not issue K-1s, nor do commodity ETNs. The following table is a list of all commodity ETPs as of February 2015 that issue a K-1.

TickerETFExpense Ratio
(AGQ A-)Ultra Silver0.95
(BAR )Daily Gold Bull 3x Shares1.56
(BARS )Daily Gold Bear 3x Shares1.56
(BNO A-)United States Brent Oil Fund0.9
(BNPC n/a)STREAM S&P Dynamic Roll Global Commodities Fund0.65
(BOIL B)Ultra DJ-UBS Natural Gas0.95
(CANE C)Sugar Fund1.77
(CMD B+)UltraShort DJ-UBS Commodity0.95
(CORN B)Corn Fund2.75
(CPER A-)United States Copper Index Fund0.65
(CRUD C+)WTI Crude Oil Fund1
(DBA A)DB Agriculture Fund0.85
(DBB A)DB Base Metals Fund0.75
(DBC A)DB Commodity Index Tracking Fund0.93
(DBE A)DB Energy Fund0.75
(DBO A-)DB Oil Fund0.75
(DBP B+)DB Precious Metals Fund0.79
(DBS C)DB Silver Fund0.79
(DGL B+)DB Gold Fund0.79
(DNO A+)United States Short Oil Fund0.6
(FOL B-)2x Oil Bull/S&P 500 Bear0.75
(FSG C+)2x Gold Bull/S&P 500 Bear0.75
(GCC B)Continuous Commodity Index Fund0.85
(GLDS )Daily Gold Bear 3x Shares1.56
(GLL A-)UltraShort Gold0.95
(GSG B+)GSCI Commodity-Indexed Trust Fund0.75
(KOLD B-)UltraShort DJ-UBS Natural Gas0.95
(NAGS C)Natural Gas Fund1.5
(SCO A+)UltraShort DJ-UBS Crude Oil0.95
(SOYB B)Soybean Fund1
(TAGS B)Agricultural Fund0.5
(UCD B)Ultra DJ-UBS Commodity0.95
(UCO A)Ultra DJ-UBS Crude Oil0.95
(UGA A)United States Gasoline Fund LP0.6
(UGL A)Ultra Gold0.95
(UHN B+)United States Diesel Heating Oil Fund0.6
(UNG B)United States Natural Gas Fund LP0.6
(UNL B+)United States 12 Month Natural Gas Fund0.75
(USAG C+)United States Agriculture Index Fund0.65
(USCI A-)United States Commodity Index Fund0.8
(USL A+)United States 12 Month Oil0.88
(USMI B)United States Metals Index Fund0.65
(USO A)United States Oil Fund0.45
(WEAT C)Wheat Fund3.74

Currency ETPs

Currency products also have a strong representation in the K-1 space, as a number utilize futures contracts to fulfill their methodologies. Again, not all currency ETPs issue a K-1; the actively-managed currency ETFs from WisdomTree, ETNs from iPath, and grantor trusts from Rydex allow for avoidance of these documents. The following table is a list of all currency ETPs that issue a K-1 as of February 2015.

TickerETFExpense Ratio
(CROC A)UltraShort Australian Dollar0.95
(DBV A-)DB G10 Currency Harvest0.81
(EUFX C)Short Euro0.95
(EUO A)UltraShort Euro0.95
(GDAY )Ultra Australian Dollar0.95
(UDN A-)DB USD Index Bearish0.8
(ULE B+)Ultra Euro0.95
(UUP A)DB USD Index Bullish0.8

Other ETPs

The following table shows all other ETPs that issue a K-1, stretching across a few asset classes including equity and alternatives. As a rule of thumb, you should always do careful research before investing in a fund with a complex strategy. Here are the remaining ETPs that issue a K-1 as of February 2015:

TickerETFExpense Ratio
(ALT n/a)Diversified Alternatives Trust1.02
(FSA C)2x T-Bond Bull/S&P 500 Bear0.75
(FSE B)2x S&P 500 Bull/T-Bond Bear0.75
(FSU n/a)2x S&P 500 Bull/USD Bear0.75
(SVXY A-)Short VIX Short-Term Futures ETF0.95
(UVXY B-)Ultra VIX Short-Term Futures ETF0.95
(VIXM A+)VIX Mid-Term Futures ETF0.85
(VIXY A-)VIX Short-Term Futures ETF0.85

Follow me on Twitter @JaredCummans.

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Disclosure: No positions at time of writing.

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