Are ETFs 40 Act Funds? Structures, Exceptions, and Tax Impact

Yes, most exchange-traded funds are 40 Act funds. They are registered as investment companies under the Investment Company Act of 1940 and follow the same core rules that apply to traditional mutual funds. A smaller group of exchange-traded products — those that hold physical commodities, trade futures, or use heavy leverage — sit outside the 1940 Act and are regulated under different statutes with fewer built-in protections. Whether a given ticker falls on one side of that line or the other changes what oversight applies, how you’re taxed, and what you can expect to see disclosed.

Why Most ETFs Fall Under the 1940 Act

The Investment Company Act uses a broad definition. Under 15 U.S.C. § 80a-3(a)(1), an “investment company” is any issuer that holds itself out as being primarily in the business of investing, reinvesting, or trading in securities, or that owns investment securities worth more than 40 percent of its total assets.¹

A typical stock or bond ETF fits that definition without effort. It pools money from investors, uses the money to build a portfolio of securities, and markets itself publicly as an investment vehicle. Once it lands inside the definition, it has to register with the Securities and Exchange Commission and comply with the Act’s rules on leverage, affiliated transactions, daily portfolio valuation, and board oversight.

The Two 40 Act Structures ETFs Actually Use

The 1940 Act divides investment companies into three principal classes: face-amount certificate companies, unit investment trusts, and management companies.² Face-amount certificate companies are largely historical. ETFs use one of the other two.

Open-End Management Companies

The vast majority of ETFs launched today are open-end management companies. The structure lets the fund continuously issue and redeem shares in large blocks called creation units, so the fund grows or shrinks with investor demand. It also requires a board of directors, and federal law limits “interested persons” — people affiliated with the fund’s investment adviser or other service providers — to no more than 60 percent of that board.³ At least 40 percent of the board must be independent.

Unit Investment Trusts

A handful of the oldest and largest ETFs, including some that track major stock indexes, are organized as unit investment trusts. A UIT holds a relatively fixed portfolio and operates under a trustee and sponsor rather than a board of directors.² Because a UIT cannot easily change its holdings, it lacks the flexibility of an open-end management company, and virtually all new ETFs choose the open-end structure instead.

Rule 6c-11 in Plain Terms

In 2019 the SEC adopted Rule 6c-11, which sets standardized conditions any qualifying ETF can rely on to operate under the 1940 Act.⁴ The rule defines an ETF as a registered open-end management company that issues and redeems creation units through authorized participants and lists its shares on a national securities exchange at market-determined prices.

For investors, the rule’s most visible effect is disclosure. A 6c-11 ETF has to publish its full portfolio holdings on a free public website before the market opens each business day, along with the prior day’s net asset value, market price, and premium or discount, and the median bid-ask spread over the past 30 calendar days. If shares trade at a premium or discount greater than 2 percent for more than seven consecutive trading days, the fund has to post a statement explaining likely causes and leave it up for at least a year.⁴

Rule 6c-11 does not cover leveraged or inverse ETFs. Those products still require individual exemptive orders from the SEC.⁵

Which ETFs Are Not 40 Act Funds

Not every exchange-traded product on your brokerage screen is an investment company. Several common categories sit outside the 1940 Act and register their shares under the Securities Act of 1933 instead.

Commodity Pools

Funds that gain exposure to commodities through futures contracts are typically structured as commodity pools. Futures contracts are not “securities” under the 1940 Act, so these funds do not meet the definition of an investment company. They register their shares under the 1933 Act and are regulated by the Commodity Futures Trading Commission. Investors receive a Schedule K-1 at tax time rather than a Form 1099.

Grantor Trusts

Exchange-traded products that hold a single physical asset — most commonly gold, silver, or another precious metal — are often organized as grantor trusts. Because the trust holds a physical commodity rather than a diversified portfolio of securities, it does not qualify as an investment company. These trusts register under the 1933 Act, and their disclosure focuses on the nature of the physical holdings, storage arrangements, and associated costs.

Leveraged and Inverse ETFs

Leveraged ETFs aim to deliver a multiple of a benchmark’s daily return, and inverse ETFs seek the opposite of a benchmark’s daily return. Many are technically registered under the 1940 Act as open-end management companies, but they are excluded from Rule 6c-11 and operate under individual exemptive orders.⁵ Daily compounding also means their returns can diverge significantly from the benchmark over periods longer than a single day, which is why they are generally used for short-term trading rather than long-term holding.

What 40 Act Status Actually Gets You

The label matters because it carries substantive protections that an ordinary 1933 Act registration does not.

An independent board of directors monitors the fund’s operations and its relationship with the investment adviser, with independence requirements set by statute.³
The 1940 Act restricts how much an investment company can borrow, limiting the leverage a fund can put on top of its portfolio.
Each fund must maintain a written liquidity risk management program, classify every holding by liquidity level at least monthly, and cap illiquid investments at 15 percent of net assets. A breach of that 15 percent limit has to be reported to the board within one business day.⁶
A fund whose derivatives exposure exceeds 10 percent of net assets must adopt a full derivatives risk management program and appoint a dedicated derivatives risk manager.⁷
Under Rule 6c-11, the fund publishes its full portfolio holdings each morning before the market opens, so you can see exactly what you own.⁴
The Act limits transactions between the fund and its affiliates, reducing the risk that fund assets are used to benefit connected parties at shareholders’ expense.

Exchange-traded products outside the 1940 Act still have to register their shares and provide a prospectus, but the ongoing governance and operational safeguards are less comprehensive.

The Tax Difference You’ll Actually Feel

A 40 Act ETF structured as an open-end management company or UIT can elect to be treated as a regulated investment company for federal tax purposes if it meets two annual tests. At least 90 percent of its gross income has to come from dividends, interest, securities gains, and similar investment income. It also has to satisfy a quarterly diversification test: at least 50 percent of assets in cash, government securities, shares of other regulated investment companies, and other securities limited to no more than 5 percent of total assets and 10 percent of an issuer’s voting securities per position, with no more than 25 percent of total assets in any single issuer.⁸

When a fund qualifies and distributes substantially all of its income and gains, the fund itself pays little or no corporate-level tax. You receive a Form 1099 for your dividends and capital gains distributions and report them on your individual return.

Exchange-traded products structured as commodity pools or partnerships operate under a different regime. Investors receive a Schedule K-1 instead of a 1099, which tends to complicate tax preparation and can arrive later in the filing season. Partnership income can also run into deductibility limits based on the investor’s basis, at-risk rules, and passive activity rules that regulated investment company shareholders do not face. If you hold a commodity or futures-based exchange-traded product, plan on that added filing complexity.

How to Tell What You’re Actually Buying

The label on the exchange does not tell you which statute a product is registered under. Two clues do most of the work.

First, look at what the fund holds. A fund holding stocks, bonds, or a mix of them is almost certainly registered under the 1940 Act. A fund holding physical metal, futures contracts, or currency is probably not. A fund built to deliver 2x, 3x, or -1x a benchmark’s daily return sits in its own category and is excluded from the standard ETF rule even when it is registered under the 1940 Act.

Second, check the fund’s prospectus and its tax documents. A 40 Act ETF’s prospectus will identify the fund as a registered open-end management company or a unit investment trust and will describe its status as a regulated investment company for tax purposes. Products organized as commodity pools or grantor trusts say so on the cover of the prospectus and warn about K-1 reporting. If you already own the fund, the form your broker sends in January answers the question directly: a 1099 points to a 40 Act ETF taxed as a regulated investment company, and a K-1 points to a product taxed as a partnership.

1
Office of the Law Revision Counsel. 15 USC 80a-3 – Definition of Investment Company
2
Office of the Law Revision Counsel. 15 USC 80a-4 – Classification of Investment Companies
3
Office of the Law Revision Counsel. 15 USC 80a-10 – Affiliations or Interest of Directors, Officers, and Employees
4
eCFR. 17 CFR 270.6c-11 – Exchange-Traded Funds
5
SEC.gov. Exchange-Traded Funds – Conformed to Federal Register Version
6
eCFR. 17 CFR 270.22e-4 – Liquidity Risk Management Programs
7
eCFR. 17 CFR 270.18f-4 – Exemption From the Requirements of Section 18 and Section 61 for Certain Senior Securities Transactions
8
Office of the Law Revision Counsel. 26 USC 851 – Definition of Regulated Investment Company