Back in April I wrote about the Security and Exchange Commission’s review of the use of derivatives in exchange traded funds (ETF) and how a crackdown on their use would be a major drawback for commodity ETF investors.

ETF Securities (ETFS) has laid down a gauntlet with its recent filing to add 18 new commodity funds to its US lineup. The funds propose to use a special type of swaps contract to greatly improve the tax efficiency of commodity ETFs.

Currently, both futures and futures-based ETFs face a potential maximum 60 percent capital gains rate, making the products very costly. The ETFS filing indicates that if approved, its 18 new funds (eight long funds, five short funds and five leveraged funds) would use a special type of prefunded swap agreement which based on current rules would bring the taxation of the funds in line with the current prevailing gains rates which for 2010 top out at 35 percent on short-term gains and 15 percent on long-term gains.

Given the broad range of commodities the funds would cover–from ex-US oil and natural gas to copper and wheat–the cost savings would be a boon for investors if the SEC approves them. But that approval will be tough to win.

The inquiry was initially prompted by the losses investors suffered and the unpredictable performance of leveraged and inverse ETFs during the 2008 market meltdown. Then the scope of the inquiry broadened in the wake of the May 6 Flash Crash.

On May 24, the SEC and the Commodity Futures Trading Commission (CFTC) held a joint meeting to discuss the role ETFs played in that day’s huge volatility spike. Based on a PowerPoint presentation released from the meeting, futures and derivatives were a major topic of discussion. While the E-mini S&P 500 futures were the primary focus, the concern expressed about the liquidity dislocation in their trading doesn’t bode well for the use of a broad spectrum of derivatives and futures by ETFs.

While those concerns aren’t entirely unwarranted given the strange trading activity that occurred on May 6, the danger is that regulators will miss the forest for the tress, cracking down on the derivates themselves rather than finding and fixing the root of the problem.

While that should never be acceptable, it’s particularly problematic if it means that funds like those being proposed by ETFS, which can be of real value to investors, can’t make it to market.

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What’s New

Trading in iShares MSCI Poland Investable Market Index (NYSE: EPOL) commenced on May 26 on the heels of an upwardly revised growth forecast issued by the Organization for Economic Cooperation and Development (OECD). The OECD now says that it expects Polish GDP to grow by 3.1 percent in 2010 and 3.9 percent in 2011, making it one of the fastest growing economies in Eastern Europe.

While Market Vectors Poland (NYSE: PLND) offers a bit better diversification in my opinion given its smaller stake in financials, the iShares offering is already winning the battle for assets with $33.2 million in assets despite launching six months later than the Market Vectors fund, which currently holds $26.3 million.

There are two major reasons for that. First, the name recognition enjoyed by iShares gives it a much broader following than the Market Vectors brand which, while enjoying a growing recognition, is hard pressed to match the marketing machine of iShares.

Second, given the economies of scale that iShares can leverage, its expense ratio is much lower–0.65 percent versus the 0.76 percent annual price tag–than Market Vectors Poland.

While I would prefer to see a smaller stake in financials, the cost savings alone makes iShares MSCI Poland Investable Market Index the more attractive fund.