Richard Shaw of Seeking Alpha writes that unlike exchange traded funds(ETFs), exchange traded notes (ETNs) are debt instruments subject to risk of default by the issuer as counter party. Therefore, investors should have a credit risk metric for ETNs.

ETNs offer an alternative or solution to accessing difficult investments areas, such as India or commodities.  There is no effective limit as to what can be used to index the principle value of an ETN.  ETNs cause counter party risk, where the ETN issuer assumes the risk that they can offset their liabilities under the ETNs by any means they choose, but insolvency by the issuer for any reason causes the ETN holders to become general creditors in bankruptcy court. Basically, be careful investing in ETNs as they involve credit risk.

Tags: ETNs