First Trust Plans Active Commodities ETF
November 14, 2012
First Trust, the money management firm known for niche strategies such as an Internet-focused ETF, filed regulatory paperwork detailing plans to market an active futures-based multicommodity fund, though it will achieve its exposure indirectly by investing in a Cayman Islands-based unit in a strategy that may have positive tax implications for investors in the fund.
The First Trust Global Tactical Commodity Strategy Fund will have no more than 25 percent of its assets invested in the Caymans unit, which itself will have holdings in commodities consisting of futures contracts and "commodity-linked instruments," including derivatives, that provide net long exposure, the prospectus said.
The unit’s futures exposure will include aluminum, Brent crude, live cattle, cattle feeder, cocoa, coffee, copper, corn, cotton, crude oil, gas oil, gasoline, gold, heating oil, lean hogs, lead, natural gas, nickel, platinum, silver, soybean, soybean meal, soybean oil, sugar, tin, wheat and zinc, the filing said.
The investment strategy involving the FT Cayman Subsidiary appears to be motivated by an aim to serve up commodities-type exposure that isn’t accompanied by tax treatment of futures involving everything from annual mark-to-market tax bills and “K-1” tax forms, according to IndexUniverse President of ETF Analytics Matt Hougan.
Futures investors have tax issues to deal with every year, regardless of whether they sell their positions, and the indirect exposure via the Caymans unit would appear to make the futures holding taxed like equities.
That would also mean that investors could be taxed at either short-term or long-term capital gains rates, depending on whether their holding period would be less than a year or more, respectively. By contrast, futures are always taxed at a combined rate of 60 percent at long-term rates and 40 percent at short-term rates, regardless of the holding period.
The prospectus said that those funds not invested in the Caymans unit will be invested in U.S. government securities and money market instruments. Those funds will essentially serve as the fund’s collateral for the margined investments the ETF is making indirectly in the futures markets.
The prospectus, which didn’t include a ticker or proposed annual cost of the fund, clearly stated the ETF won’t invest directly in commodities.
It's not at all clear that the Securities and Exchange Commission will readily approve such a prospectus given the SEC's derivatives-related review that began in March 2010 and in still not completed.