Barclays iPath exchange traded notes (ETNs), not to be confused with exchange traded funds (ETFs), were invented to give investors access to otherwise difficult to reach asset classes. Robert N. Gordon for InvestmentNews is quick to point out the similarities between ETFs and ETNs; both trade on an exchange and both provide liquidity.

ETNs do not resemble mutual funds; they are unsecured debt securities where the investor takes on the counterparty credit risk of the sponsor. ETNs are prepaid forward contracts guaranteed by Barclays to pay, based on the amount invested, at maturity.

Is there magic in the tax benefit of ETNs? From a tax standpoint, ETNs are tax-deferrable and offer possible long-term capital gains. There are no distributions and currently, the only tax incurred is at the time of sell; the IRS still has not ruled on the tax treatment of ETNs. 

Currently there are eight iPath ETNs representing commodities, currencies, India and covered calls. Before adding to a portfolio, make sure you understand how ETNs are structured, how you might be affected from a tax viewpoint and how it fits with your financial goals.

Tags: ETNs