Large mutual funds, including Vanguard and Fidelity, are asking the U.S. government to review the tax advantages of ETNs, with the Investment Company Institute, the trade association representing these firms, calling the benefits "unwarranted, unintended and unfair." These companies are concerned because owners of ETNs are not required to pay any capital gains tax until the note is sold or it expires and is redeemed, where mutual fund and ETF owners must pay taxes on realized gains and distributions each year, which affects mutual funds more than ETFs.

David Hoffman at InvestingNews.com recently wrote an article explaining the battle between the mutual fund industry and ETN issuers, and he feels that the mutual fund industry will ultimately come out on top. Fortunately, the CEO of the Securities Industry and Financial Markets Association of New York and Washington, Marc E. Lackritz, sent a letter to the Ways and Means Committee last month characterizing the position of the ICI as a competitive one, rather than one based on a valid concern about tax policies.

If the tax advantages of ETNs are removed by new legislation, some of the ETNs that invest in sectors that are already covered by established mutual funds and ETFs may struggle to survive, but other ETNs that are breaking new ground should still make gains in the investing world.