Commodity ETFs and Schedule K-1: What You Need to Know
- Commodity ETFs typically generate a schedule K-1 instead of a 1099 form.
- K-1s may bring to mind late tax forms and/or problematic types of income like UBTI, but these don't occur with most commodity ETFs.
- Helpful information for investors who hold or are considering commodity ETFs.
A K-1 is a tax form on which certain type of trusts and partnerships will report the shareholder's share of the entity's income over the past year. One of the most common situations in which an exchange-traded fund will generate a K-1 is when the ETF invests in commodity futures contracts. You will get a K-1 for the ETF instead of seeing the income on a 1099 form. (ETFs that invest directly in the hard commodity itself, such as some gold ETFs, do not generate K-1s for their shareholders.)
Some investors worry when they hear that their commodity ETF will generate a K-1. There are two main reasons for concern.
- First, some entities that generate K-1s have a history of sending out their K-1s after April 15, which can complicate matters for shareholders at tax time.
- Second, some entities that generate K-1s (such as certain real-estate partnerships), can generate income known as Unrelated Business Taxable Income, or UBTI. This type of income is taxable even if you hold the investment inside a tax-advantaged account, which is naturally a concern for IRA investors.
Fortunately, the straightforward commodity ETFs of interest to most investors have a history of sending K-1 statements in a timely manner (no later than March), and don't generate UBTI. This is not to say that these ETFs could never have such issues in the future, but they have not had them in the past. Commodity ETFs that use leverage, on the other hand, should be viewed with more caution.
Concerns about K-1 statements from plain-vanilla ETFs that invest in commodity futures contracts should generally not be a reason to avoid these investments, assuming they otherwise make sense for your portfolio. A K-1 is just a different tax reporting form, and not necessarily cause for alarm.
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Some specialized exchange-traded funds can be subject to additional market risks. Investment returns will fluctuate and are subject to market volatility, so that an investor's shares, when redeemed or sold, may be worth more or less than their original cost.
Commodity-related products carry a high level of risk and are not suitable for all investors. Commodity-related products may be extremely volatile, illiquid and can be significantly affected by underlying commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions.
This article is for informational purposes only and is not an offer, solicitation or recommendation that any particular investor should purchase or sell any particular security or pursue a particular investment strategy. The types of securities mentioned herein may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation.
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