ETF's

**Wanderer** · May 6th, 2010, 09:50 AM

THE INTELLIGENT INVESTOR
Wall Street Journal
APRIL 17, 2010

Watch Out for Hidden Tax Traps Inside ETFs

By JASON ZWEIG

Does ETF stand for "esoterically taxed fund"?

Many investors may just have finished wading through the tax reporting on commodity or currency funds for the first time and found it a slog. They also may have learned that an investment's taxation can by itself make the difference between a winner and a loser. Exchange-traded funds, or ETFs, are bundles of assets that resemble a mutual fund but trade on an exchange like a stock. Their structure has enabled many of them to avoid distributing taxable capital gains, earning a reputation for minimizing investors' tax bills. But the mad dash in ETFs lately has been into "alternative assets" like currencies and commodities. The investment researchers at Morningstar track 108 such ETFs with a total of $80 billion in assets; 42 are less than two years old. These funds are taxed so differently, and at such higher rates than traditional investments, that many investors now wish they had looked before they leaped.

You shouldn't invest in a commodity or currency ETF at all unless you "thoroughly understand what type of income the transaction will generate and what your tax rate will be," says Robert Keebler, a CPA at Baker Tilly Virchow Krause in Appleton, Wis. That means plowing through the "Income Tax Considerations" section in the ETF's prospectus. If necessary, get a tax adviser or someone at your brokerage house to explain it. With tax rates on the rise, you can't afford not to know whether you are getting into a can of worms.

This article is a "head's up" on EFT's. They seem very interesting but unlike mutual funds, may equal a mix of taxing situations that the purchaser is liable for and responsible to handle. Caution is the name of the game.