ETFs Meet ETNs

Now that investors are well aware of exchange traded funds (ETFs), there is a new option, the exchange traded note (ETN). Investopedia.com described ETNs as the ETFs cousin. Three ETNs are available by Barclay’s Bank:

• iPath Dow Jones-AIG Commodity Index Total Return (DJP)
• iPath GSCI Total Return Index (GSP)
• iPath Goldman Sachs Crude Oil Total Return Index (OIL)

The difference in an ETN and an ETF is the structure. ETNs are issued as a senior bank note and ETFs represent a stake in an underlying commodity. The bigger difference comes down to tax treatment and credit risk. Investors should treat ETNs as prepaid contracts and any difference between the sale and purchase is classified as capital gains. ETNs possess credit risk ,however, they do not have a tracking risk, unlike ETFs where there is possibility the returns will differ from the underlying index.