July 31, 2009 at 12:00 pm by Tom Lydon
The proliferation of exchange traded funds (ETFs) has overshadowed their cousin, exchange traded notes (ETNs). While not as widely used, ETNs have some benefits of their own that are worth considering.
ETNs differ from ETFs in a few ways, and they share similarities worth noting, too. Stan Luxenberg for The Street notes:
- Like ETFs, ETNs can trade like a single stock
- ETNs can be sold short, just as ETFs can
- ETNs, like ETFs, offer exposure for investing in commodities, emerging market stocks, currencies and other assets that are difficult to trade
Unlike ETFs, though, ETNs are debt obligations backed by the full faith and credit of the issuer. When the credit markets froze last year, this feature became a concern for investors who were skittish in the wake of collapsing financial institutions.
ETNs don’t own any stocks outright. Instead, the ETN backer issues notes that track the value of the benchmark. If the index rises 10%, investors get exactly that amount minus expenses. Because the ETN holds no stocks, investors receive no income and need not pay any taxes unless they profit from the sale of a note.
For more stories about ETNs, visit our ETN category.
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