Question

1. Using the information on the taxation of REIT distributions, what was the tax status of recent annual distributions made by Plum Creek Timber (PCU), UDR, and WRE?
2. Why does arbitrage virtually assure that an ETF will sell for its NAV?

Answer 1

Answer :

The taxation of REIT distributions is more complicated than cash dividends from corporation. REIT distributions may be earnings, capital gains, and return of capital, each of which is subject to different tax rates. This question asks the student to determine the tax status of three REITs. Plum Creek holds timber and its distributions are generally taxed as long-term capital gains. UDR and WRE hold real properties and their distributions may be income, capital gains, and/or return of capital.

ETFs may bought and sold (including selling short). If the net value were to deviate from the fund's net asset value, large financial institutions would arbitrage away the difference. If the net asset value of the fund exceeded the value of the underlying assets, the institutions would buy the assets and short the fund. They would then deliver the purchased shares to cover the short positions.