Exchange Traded Notes (ETNs) are senior, unsecured, unsubordinated debt securities that are designed to track the total return of a specific market index, less investor fees, and provide investors with exposure to the total returns of various market indices, including indices linked to stocks, bonds, commodities and currencies.
Exchange Traded Access Securities (ETRACS) belong to an innovative class of investment products offering easy access to markets and strategies that may not be readily available to individual investors. After their initial offering, ETRACS ETNs can be bought and sold through a broker or financial advisor on a US securities exchange. ETNs are not equities or index funds, but they do share several characteristics with those products.
The ETRACS currently available are issued by UBS AG and listed on the NYSE Arca exchange. They may be purchased in a similar way to other publicly traded securities and can be bought or sold at any time during market hours.
How to invest in ETRACS
How to sell ETRACS ETNs
Redemption info
How to Redeem ETRACS ETNs
Investors should consult their broker or financial advisor for more information.
ETRACS Treatment for US Federal Income Tax Purposes
This discussion applies to you only if you hold your ETRACS as capital assets for tax purposes. This section does not apply to you if you are a member of a class of holders subject to special rules or a Non-United States holder.
There is no authority that directly addresses the tax treatment of your ETRACS and thus the tax treatment of your ETRACS is uncertain. However the ETRACS are intended to be treated as a pre-paid forward contract with respect to the Index and the terms of the ETRACS require you and us (in the absence of a statutory, regulatory, administrative or judicial ruling to the contrary) to treat the ETRACS for all tax purposes in accordance with such characterization. If the ETRACS are so treated, you should recognize capital gain or loss upon the sale, redemption or maturity of your ETRACS in an amount equal to the difference between the amount you receive at such time and your tax basis in the ETRACS. In general, your tax basis in your ETRACS will be equal to the price you paid for it. Capital gain of a non-corporate United States holder is generally taxed at preferential rates where the property is held for more than one year. The deductibility of capital losses is subject to limitations. Your holding period for your ETRACS will generally begin on the date after the issue date (i.e., the Settlement Date) for your ETRACS and, if you hold your ETRACS until maturity, your holding period will generally include the maturity date.
The Internal Revenue Service has recently released a notice that may affect the taxation of holders of the ETRACS. According to the notice, the Internal Revenue Service and the Treasury Department are actively considering whether the holder of an instrument such as the ETRACS should be required to accrue ordinary income on a current basis, and they are seeking taxpayer comments on the subject. It is not possible to determine what guidance they will ultimately issue, if any. It is possible, however, that under such guidance, holders of the ETRACS will ultimately be required to accrue income currently and this could be applied on a retroactive basis. The Internal Revenue Service and the Treasury Department are also considering other relevant issues, including whether additional gain or loss from such instruments should be treated as ordinary or capital, whether foreign holders of such instruments should be subject to withholding tax on any deemed income accruals, and whether the special "constructive ownership rules" of Section 1260 of the Internal Revenue Code might be applied to such instruments. Holders are urged to consult their tax advisors concerning the significance, and the potential impact of the above considerations. Except to the extent otherwise required by law, UBS intends to treat your ETRACS for United States federal income tax purposes in accordance with the treatment described above unless and until such time as the Treasury Department and Internal Revenue Service determine that some other treatment is more appropriate.
In addition, a member of the House of Representatives has recently introduced a bill that, if enacted, would require holders of the ETRACS purchased after the bill is enacted to accrue interest income over the term of the ETRACS despite the fact that there will be no interest payments over the term of the ETRACS. It is not possible to predict whether this bill or a similar bill will be enacted in the future and whether any such bill would affect the tax treatment of your ETRACS.
In addition, it is possible that (i) the ETRACS could be treated as a debt instrument subject to the special tax rules governing contingent debt instruments, (ii) the ETRACS could be treated as a series of forward contracts each of which mature on the next rebalancing date and/or roll date or (iii) Section 1256 of the Internal Revenue Code could apply to your ETRACS.
Because of the absence of authority regarding the appropriate tax characterization of your ETRACS, it is possible that the IRS could seek to characterize your ETRACS in a manner that results in tax consequences to you that are different from those described above. For example, the IRS could possibly assert that (i) you should be treated as if you owned the underlying components of the underlying Index, (ii) you should be required to accrue interest income over the term of your ETRACS, (iii) any gain or loss that you recognize upon the exchange or maturity of your ETRACS should be treated as ordinary gain or loss or (iv) you should be required to include in ordinary income an amount equal to any increase in the underlying index that is attributable to ordinary income that is realized in respect of the component of the underlying index, such as interest, dividends or net-rental income. You should consult your tax adviser as to the tax consequences of such characterizations and any possible alternative characterizations of your ETRACS for U.S. federal income tax purposes.
Investors should note that the intended tax treatment discussed above may not apply to all ETRACS, and that the expected tax treatment of particular ETRACS will depend on the specific nature and terms of those ETRACS. The tax summary provided in the disclosure document for particular ETRACS will supersede, and should be read to replace, the above discussion in respect of those ETRACS. In evaluating any potential investment in ETRACS, investors should refer to, and carefully consider, the tax summary in the relevant disclosure document for particular ETRACS, and should consult their own tax advisors regarding the tax consequences to them of an investment in those ETRACS in light of their particular circumstances as a taxpayer and the specific characteristics and terms of those ETRACS.
No assurance can be given that future tax legislation, regulations or other guidance may not change the tax treatment of ETRACS. Even if the tax treatment of ETRACS is changed for any reason only on a prospective basis, that could affect our ability to issue additional ETRACS under an existing prospectus supplement, which could affect liquidity for ETRACS issued prior to such change.
We do not offer tax or legal advice. An investor should consult with tax and legal advisors before investing.
| ETN | ETF | Mutual Fund | |
| Type of Security | Debt Securities | Registered Investment Companies | Registered Investment Companies |
| Liquidity | Daily on exchange | Daily on exchange | Daily (close of business) at net asset value |
| Tax | Tax reporting intended in year of sale, maturity or repurchase by the issuer | Yearly 1099 tax reporting | Yearly 1099 tax reporting |
| Registration | Securities Act of 1933 | Investment Company Act of 1940 | Investment Company Act of 1940 |
| Investor ownership | Senior, unsecured debt of the ETN issuer | Equity stake in a portfolio of securities | Equity stake in a portfolio of securities |
| Principal Risk | Market and issuer risk | Market risk | Market risk |
| Short Sales | Yes, subject to lending availability | Yes, subject to lending availability | Not available |
| Voting Rights | None | Yes | Yes |
Access to New Markets and Strategies
Certain asset classes and strategies are not easily accessible to individual investors. ETRACS provide opportunities to gain exposure to these asset classes and strategies in a convenient and cost-efficient way.
Portfolio Diversification
ETRACS are designed to provide investors with exposure to the total returns of various market indices, including stocks, bonds, commodities, Master Limited Partnerships (MLPs), and currencies in order to construct a well-rounded portfolio to meet their investment objectives.
Price Transparency
ETRACS are designed to provide a return that is linked to the performance of an underlying index, less the investor fee amount.
The daily closing prices, daily closing indicative values and daily repurchase values of all ETRACS and the daily closing levels of their underlying indices will be available in the product section for that particular ETN so that investors can easily track the performance of their ETRACS products.
Tax Efficiency
ETRACS are intended to offer a tax-efficient way to invest. Index mutual funds and exchange-traded funds (ETFs) are often required to make yearly taxable income and capital gains distributions to shareholders. In contrast, under the intended tax treatment of the ETRACS, the timing of the realization of gains or losses on their ETRACS is based on when investors buy and sell their investment. Under the intended treatment, investors will only realize gains or losses upon the sale, maturity or repurchase by the issuer of their ETRACS ETNs.
For a more complete understanding of the intended tax treatment of particular ETRACS and any related tax risks investors should read the related ETRACS prospectus supplement regarding their expected tax treatment. We do not offer tax or legal advice. Investors are urged to consult with tax and legal advisors before investing.
Flexibility and Liquidity
Similar to equities, ETRACS offer the liquidity provided by exchange listing. Individual investors can choose to sell ETRACS in the secondary market at market prices during trading hours or hold them until maturity or may elect to require UBS to redeem the ETRACS prior to maturity. Investors may elect to require UBS to redeem ETRACS on a daily basis (as specified in the relevant ETRACS prospectus supplement for each offering of ETRACS). UBS will have certain requirements for early redemption. Please consult a broker or financial advisor for more information. Investors will receive a cash payment based on the performance of the index, less an investor fee amount, at maturity or earlier redemption by UBS.
For a more comprehensive list of risk factors, please refer to the respective prospectus supplement and prospectus for the particular offering of ETRACS in which you are considering an investment.
No Principal Protection
The ETRACS are fully exposed to any decline in the level of the underlying index. If the value of the underlying index decreases, or does not increase by an amount greater than the aggregate investor fee applicable to ETRACS, an investor will receive less than the investor's original investment in ETRACS upon maturity or early redemption by UBS and could lose up to 100% of the original principal amount.
Underlying Index Risk
The return on each ETRACS is linked to the performance of its underlying index, which, in turn, is linked to the prices of the underlying index components. These prices are determined based on a variety of market and economic factors and may change unpredictably, affecting the value of the underlying index and, consequently, the value of your ETRACS in unforeseeable ways.
Concentrated Investment Risk
The underlying index components of some ETRACS may be concentrated in a specific sector. The investment may therefore carry risks similar to a concentrated investment in a limited number of industries or sectors.
Issuer Risk
ETRACS are unsecured debt securities of UBS. The payment of the amount due on the ETRACS upon early redemption by UBS or at maturity is dependent on UBS's ability to pay.
A Trading Market for the ETRACS May Not Develop
Although ETRACS are listed on a U.S. securities exchange, a trading market for ETRACS may not develop. Affiliates of UBS and the broker-dealers distributing ETRACS may engage in limited purchase and resale transactions. However, they are not required to do so and, if they engage in such transactions, they may stop at any time. UBS is not required to maintain any listing of ETRACS on an exchange.
Minimum redemption amount
ETRACS may be sold throughout the day on the relevant exchange through any brokerage account. There are restrictions on the minimum principal balance of ETRACS that you may redeem directly with UBS as specified in the applicable prospectus supplement or other relevant offering document.
No early redemption for limited period following issuance
You may not be permitted to elect to redeem your ETRACS for a limited period following the initial issue date for the particular ETRACS you purchase. Accordingly, your ability to liquidate your ETRACS may be limited prior to this date.
Election of early redemption is irrevocable
Investors will not be able to rescind their election to redeem your ETRACS after a redemption notice is received by UBS and will be exposed to market risk in the event market conditions change between that time that UBS receives the election and the time that the amount payable upon redemption is determined on the applicable valuation date.
UBS' contingent call right
UBS may have the right to elect to redeem all, but not less than all, of the outstanding ETRACS relating to a particular index subject to the satisfaction of certain conditions to be specified in the applicable prospectus supplement.
Payment on some ETRACS may be linked to the VWAP Level, not the closing level of the underlying index
The payment on some ETRACS at maturity or call, or upon early redemption, may be based on the VWAP Level of an underlying index and not on the closing level of an underlying index, as specified in the applicable prospectus supplement.
The VWAP Level of the underlying index will most likely differ from the closing level of the underlying index.
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Important legal information specific to ETRACS ETNs Important legal and regulatory information: |
UBS has filed a registration statement (including a prospectus, as supplemented by a prospectus supplement for each offering of the ETRACS ETNs) with the Securities and Exchange Commission (the "SEC") for the offerings to which this communication relates. Before you invest, you should read these documents and any other documents that UBS has filed with the SEC for more complete information about UBS and the offerings to which this communication relates. You may get these documents for free by visiting EDGAR on the SEC website at www.sec.gov. Alternatively, you can request the prospectus and any applicable prospectus supplement by calling toll-free (+1-877-387 2275).
Products and services in this web site may not be available for residents of certain jurisdictions. Please consult the restrictions relating to the product or service in question for further information. Activities with respect to US securities are conducted through UBS Securities LLC, a US broker dealer. Member of SIPC.
For information as to which entity provides the services in each jurisdiction, click here.
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