Lehman Brothers Holdings has jumped onto the exchange traded note (ETN) bandwagon, just as the tug-of-war between exchange traded funds (ETFs) and the notes heats up.

John Spence for The Wall Street Journal reports that last month the company listed a trio of ETNs, and plans to launch more because some ETNs cover a more illiquid market better than ETFs. The funds are welcome additions, as two of them track the red-hot commodities market and a third follows a private commodity index.

Although ETNs and ETFs are often mistaken as alike, the approach is very different. An ETN is a long-term debt security issued by the investment manager. They promise to pay back the return of a certain index, minus the fees.

ETN investors take on the credit risk that the issuer will be solvent when they want to sell shares or when they reach maturity. Index tracking error gets shifted to the issuer, not the investor.

ETNs took a hit last year when the IRS took away the tax advantages of notes that provide exposure to foreign currencies. A decision on the taxes for commodity and stock ETNs is in a public comment period, but if the IRS makes a ruling against them, it could be a sharp blow to the business.

Lehman is undeterred, though, saying that they believe ETNs have a place in investor portfolios regardless of their tax treatment.

Barclays, Goldman Sachs, Bear Stearns and Deutsche Bank are other ETN providers.

Tags: ETNs

Share: Digg | Bookmark at Del.icio.us |