Electronic K-1s To Relieve Tax Headaches

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As any futures-based commodities investor knows, one of the main drawbacks to ETFs structured as commodities pools is dealing with K-1 tax forms. But relief appears to be on the way.

In the next few days, ALPS will be sending out an email blast to 50,000 RIAs discussing the advent of the so-called electronic K-1. While this may not be on par with landing on the moon or the splitting of an atom, it is a landmark event in the commodity ETF industry, which could boost asset gathering.

About $17 billion is invested in limited partnerships, the lone ETP structure that requires the receipt of a K-1. That's just 15 percent of the $120 billion invested in commodity ETPs and not even one-fourth of the $71 billion in the bullion fund SPDR Gold Shares (NYSEArca:GLD). Most of the assets are in grantor trusts and ETNs, two tax structures with very straightforward tax treatments.

But lest you think what's at stake is peanuts, some futures-based funds that get saddled with K-1s have billions in assets.

I'm referring to large funds such as the $6.7 billion PowerShares DB Commodity Tracking Fund (NYSEArca:DBC) and the $1.63 billion PowerShares DB Agriculture Fund (NYSEArca:DBA). In other words, a lot of commodities investors out there will care about this.

I'd venture to guess that that total may be about to ramp up, as more widespread adoption of electronic K-1s starts to take hold.

That's because one of the biggest investor objections to the K-1-the fact that the document didn't arrive until very late on the tax calendar-will be taken off the table.

At the end of the day, that fact alone turned many investors away from the structure, sending them to the straightforward structure of an ETN, for example, even if they had to make peace with the credit risk that's at the center of that structure.

It's hard enough to get your taxes done by April 15 every year, let alone when you have a critical piece of your taxable pie that arrives a week ahead of your drop-dead date.

No Panacea

The electronic K-1, while by no means a panacea for the commodities pool structure, will eliminate this problem by allowing investors to access their information as soon as the end of the calendar year.

Sure, the details of the K-1 can be a headache to understand, but the proliferation of the electronic version of the document will at least arm your accountant or online tax service with the information needed and enough time to get it all figured out.

Whether this leads to either a massive migration from the ETN structure or, conversely, to a flood of new commodity-pool investment funds, remains to be seen. But it's hard to dispute that these products have huge room for growth.

In a year when ETF inflows reached a record and assets flirted continuously with new highs, assets in commodities pools more or less stagnated. The disappointing growth of this group of funds comes despite a systematic adoption of the commodities asset class as a component of traditional asset allocation models.

Commodities have never been more widely used by investment professionals and money managers, and yet the commodities pools have yet to gain the type of popularity one would expect.

It could be that the practicality has yet to catch up with the accessibility.

If the process of receiving and digesting the K-1 has been one of the key roadblocks, it may finally be time for the commodities pool structure to shine.

Even if that doesn't turn out to be the case and the only thing electronic K-1s do is make existing shareholders lives' easier, the change will still represent one of the more positive developments for the futures-based ETF industry for quite some time.

At the time of this writing, the author held no positions in the securities mentioned. Contact Paul Baiocchi at pbaiocchi@indexuniverse.com.


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This article appears in: Investing , ETFs

Referenced Stocks: DBA , DBC , GLD

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