Exchange traded funds have taken the investment world by storm. Exchange traded notes have been confused with ETFs; however, they differ in important ways.
“ETNs, by their nature, allow firms to offer access to asset classes or trading strategies that can be more difficult or costly to replicate in an ETF,” said Jeffry Smith, an assistant professor of economics and business at the Virginia Military Institute, in a recent report. [Investors Warned on ETN Risks]
An ETN is a debt instrument or note that is a liability of the issuing company. An ETF is a basket of securities that track an index and focus on certain corners of a sector or asset class. ETNs focus on niche or exotic investment sectors, reports James Picerno for Bankrate. [FINRA Warns on ETN Risks]
“These ‘notes,’ which can be thought of as a bond, guarantee investors the return on a given index and have stated maturity dates (though they can be bought and sold throughout the day like stocks in the interim for those who don’t plan to hold to maturity). Thus, ETNs carry the credit risk associated with the backing financial institution but will not produce any tracking error,” John Gabriel wrote for Morningstar.
ETNs come with credit risk. They are unsecured debt obligations that promise to pay the return of a certain market index.
In contrast, an ETF is similar to a mutual fund that trades with the ease of a single stock.
Tisha Guerrero contributed to this article.