Grantor trusts are legal trusts that are managed by sponsors
with oversight responsibility over trustees who handle the
trust’s day-to-day operations.
Structure – A grantor trust issues shares that represent
units of fractional undivided beneficial interests of the trust.
These shares denote direct ownership of the trust’s assets.
Generally, the portfolio composition of a grantor trust does
not change. Grantor Trusts have a pre-set termination date.
Types – There are various grantor trusts that are available.
Some invest and hold hard assets, such as gold and other
commodities or currencies. Others indirectly invest in multiple
future contracts on those hard assets through a master feeder
structure.
Earnings – Vary, depending upon the individual grantor
trust. Some pay no distributions.
Taxation – All income, gains, losses and expenses are passed
through directly to the shareholders of the trust. Shareholders
are taxed in accordance with their pro rata direct holding of trust
assets and generally as ordinary income or loss.
Benefits/Features – Can provide access to assets or asset
classes not otherwise available or easily attainable.
HOLding Company Depositary ReceiptS (HOLDRS)
are grantor trusts that hold equities. These receipts represent
ownership by investors in each one of an assembled group of
stocks usually associated with a specific industry or sector.
There is no formal investment advisor, but there is a sponsor.
Structure – A group of stocks are initially bought and
constantly maintained but individual weightings will change
because after a HOLDR is created, new companies are not
added. As companies merge or go out of business, the
total composition and weightings of each company change.
Because a HOLDR offers an investor direct ownership, the
investor retains voting rights for each underlying security,
directly earns dividends (if any) and can sell any of the
securities held within the HOLDR basket.
Types – Various HOLDRS are available and represent different
industries and market sectors.
Earnings – Dividends pass directly to investors as they are
paid out by the underlying companies. There are no capital
gains distributions from the trust.
Taxation – Investors realize their own capital gains or losses
only when they sell their HOLDR or when they sell individual
companies from the basket. Generally, dividend income
and short-term capital gains are taxed at the investor’s
ordinary income tax rate. Long-term capital gains are taxed
at the current 15% maximum federal tax rate.
Benefits/Features – Direct voting and dividend rights are
retained by the investor. The investor controls when to sell a
stock and/or when to realize gains/losses for tax purposes.
Exchange Traded Notes (ETNs) are senior (unsubordinated),
unsecured debt securities issued by a major investment bank
whose performance is linked to an underlying benchmark,
strategy or index. Since the investment bank plays a major
role, ETNs are subject to the bank’s credit worthiness. ETNs
were first offered in June 2006.
Structure –
Most ETNs have maturity terms of 15 to 30 years, but investors
can trade in and out of them as desired. ETNs trade on a
stock exchange and track to a specific underlying index of
securities. Due to the fact that they are structured as promissory
notes and the investment bank only has to deliver the same
return as the underlying index, they are not transparent.
Types –
Several types of ETNs now exist and track to varied markets
and sectors.
Earnings –
ETNs do not pay out dividends or capital gains. Individual
capital gains or losses will depend upon the timing of each
investor’s sale of the ETN investment.
Taxation –
Short-term capital gains are taxed as ordinary income, while
long-term capital gains are taxed at the current 15% maximum
federal tax rate.
Until recently, all earnings from ETNs had been considered to
be taxable in the future in the same way that prepaid forward
contracts are taxed. In December 2007 the Internal Revenue
Service (IRS) determined that one type of ETN—single
currency ETNs—should have earnings taxed as other debt
securities. This means that any interest accrued during the
contract is taxable to investors as the interest accrues, and a
gain or loss from the sale or redemption of the instrument will
be ordinary. The IRS also announced that it would consider
and rule on how to tax other forms of ETNs with performance
linked to equity and commodity indices.
Benefits/Features – Can provide exposure to hard-to access
asset classes without directly owning the assets and
without a tracking error.
MacroShares is a trademark of MacroMarkets LLC and is not affiliated with Rydex Investments.
This information is subject to change at any time and should not be construed as a recommendation of any specific security
or strategy.
This information does not constitute tax advice. Please consult your tax advisor and/or state and local tax offices for more
complete information.
Securities are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks,
including the possible loss of the principal amount invested.
RydexShares™ are distributed by Rydex Distributors, Inc., an affiliate of Rydex Investments.
Rydex Investments 9601 Blackwell Road Suite 500 Rockville, MD 20850
800.820.0888 Send us your comments
For more complete information regarding Rydex funds, call 800.820.0888 or click here for a prospectus. Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. The fund's prospectus contains this and other information about the fund. Read the prospectus carefully before you invest or send money.
Grantor Trusts—Master-Feeder
Structure
Like regular grantor trusts, these
are set up as legal trusts managed
by a sponsor. Established under a
master-feeder structure, the vast
majority of the trust’s assets are
invested in a master trust. It is
typically operated as a commodity
pool that is registered with the
Commodity Futures Trading
Commission (an independent agency
regulating the U.S. commodity
futures and options market). The
main difference is that the regular
grantor trust invests directly
into hard assets, while the master
feeder structure invests in those
assets through futures contracts
(commodities or currencies futures).
Earnings – Vary, depending upon
the trust. Most master trusts invest in
future contracts, which require them
to invest in collateral held in cash,
which provides income to investors.
Taxation – All income, gains, losses
and expenses are passed through to
investors. Investors are then required
to include their share of income on
an annual basis. Sixty percent of the
futures’ capital gains are taxed as
long-term gains (15% rate) and 40%
of futures’ capital gains are taxed as
short-term gains (up to a 38% rate).
MacroShares™ – similar to ETNs,
these are also debt securities.
The main difference is that while
they trade separately, and each
tracks a single benchmark, they
are paired and issued together.
The holding trusts pledge assets
and the accrued income of
the assets between the related
trusts in direct proportion to the
price changes in the underlying
benchmark. Currently, there is
only one MacroShares™ registered
product that tracks the
price of crude oil and invests in
short-term U.S. Treasuries and
short-term collateralized repurchase
agreements. They pay
quarterly income distributions.
Income from U.S. Treasuries that
are distributed to holders of
shares is expected to be exempt
from state and local income
taxes. For investors who hold
MacroShares™ as capital assets,
gains or losses on share sales are
treated as capital gains or losses
with the potential for long-term
capital gains treatment.
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