Vanguard Tries To Ruin Your Investing Tax Break

February 14, 2008

You can count on mutual fund companies to try to squash any product they think is a competitive threat to their multi-trillion-dollar-in-assets cash machine.

The latest attack on mutual fund dominance is from the relatively unknown exchange traded notes (ETN). These ETF-esque securities are essentially exchange traded derivative contracts. The main force behind ETNs is Barclays iPath® Currency Exchange Traded Notes. With their popular iShares lineup, Barclays is already a big player in ordinary exchange traded funds (ETFs). So far the offerings are mostly focused on commodities and currencies. Still, according to an article on today, Vanguard is already trying to nip notes in the bud:

Barclays Plc introduced a new product that put a scare into Vanguard Group Inc. and the rest of the $13 trillion U.S. mutual-fund industry. Now Congress and the Treasury Department are coming to the funds' aid.

The security, called an exchange-traded note, allows individual investors to buy a type of forward contract linked to commodities and assets ranging from oil to currencies to foreign stock indexes. It has lower fees than mutual funds, is less regulated and, for now, lets holders defer taxable income indefinitely.

While less than $10 billion of the notes have been issued so far, mutual-fund companies see the potential for the new instruments to catch on in a big way with investors. The notes are 'derivatives for the masses,' said Alex Gelinas, a tax lawyer at Sidley Austin LLP in New York. For the mutual funds, reining them in is 'the issue of the year.'

The funds argue that the way the notes are handled for tax purposes puts their products at a disadvantage. The industry's trade group wants the government to either scrap the notes' favorable tax treatment or extend it to them too....In response, the Investment Company Institute [ICI], the trade association representing Vanguard and other funds, sent letters to Congress and Treasury calling the tax advantages of exchange- traded notes 'unwarranted, unintended and unfair.'

It got results. The Treasury Department in December said the interest income generated by currency-related notes can't be deferred because they are debt instruments. It may rule on other types of notes this year."

This is not the the first time funds acted to protect their best interests. In recent years fund companies were concerned people would buy professionally managed stock baskets without the inefficiencies, regulations, and costs of the old fashioned mutual fund structure, so they sicked their trade group, the Investment Company Institute, on small upstarts offering these services. Fortunately for fund companies, the idea never gelled with consumers as similar exchange traded funds became popular.


Vanguard's asinine assassination attempt
Anonymous — POSTED February 17th, 2008 9:57PM

Finally, the real story is starting to come out! Vanguard is attempting a backroom political kill of Barclays' new innovation that threatens to peel away a few shekels of its $1 trillion AUM. At the same time, the financial giant cowers timidly behind the protective skirt of Paul Schott Stevens' politically-connected ICI machine.

But something went awry. Paul Stevens "over-Schott" (pun intended) his manipulation of the Treasury and went after the taxation of ALL prepaid forwards. Whoopsie-daisy. This means that Vanguard's surreptitious attempt at a quick kill of ETNs has now morphed into an out-of-control clash of King Kong vs Godzilla -- namely, Wall Street vs. the Mutual Fund Industry.

But this was not a fight the mutual fund industry was spoiling for . . . they were content to have their $14 trillion monopoly and simply let the ETN industry grow their modest $10 billion cottage industry to, say, double its size. But leave it to the ICI to ham-handedly blow up this affair into a major commotion, complete with raising the retail profile of a modest little innovation called Exchange Traded Notes.

Way to go, ICI -- you guys pay Paul Schott Stevens a million bucks a year to screw the pooch when it comes to the final legacy of Jack Bogle? See you on the cover of Barrons soon!