But one of the features that may be attractive to many investors is that ETNs can help you avoid some potentially hairy tax issues.
As debt, ETNs distribute interest income that's taxable at your marginal income tax rate. Although the income doesn't qualify for the reduced dividend tax rate, you do receive a simple 1099-DIV form for the income you receive. That's especially helpful when investing in an ETN tracking master limited partnerships, where investors are subject to the more complex K-1s when investing in individual MLPs.
Also, you can hold these ETNs in a tax-sheltered IRA or 401(k) account without fear of throwing off more than $1,000 in unrelated business taxable income (UBTI) that can come from investing directly in master limited partnerships.
Combine that with their high yields and you can see why exchange-traded notes have become a favorite of income investors.
But are these the perfect income securities? They definitely provide a good option if you're looking for income, but you should be aware that most ETNs trade very few shares a day. For example, the
Morgan Stanley Cushing MLP High Income ETN
trades fewer than 3,000 shares a day, meaning it can be difficult to buy or sell large lots without moving the price.
Action to Take
: Any income investor looking for a class of securities "overlooked" by most investors would do well to spend some time researching exchange-traded notes.
Carla Pasternak does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.