As more ETNs (exchange traded notes) come into being, it might not be a bad idea to review the differences of exchange traded funds (ETFs) again. Both ETFs and ETNs can be bought and sold on exchanges like stocks and both track commodities, currencies or indexes of stocks. ETNs come in to play when ETFs can’t reach certain asset classes.

The underlying structure is different in that ETNs are 30-year debt instruments and the notes do not represent any shares of any assets.  They are a promise by the provider to pay the investor the amount reflecting a change in the underlying index; here in lies credit risk. Emily Brandon for US reports the ETNs performance will match that of the index, with no tracking error.  Tax treatment of ETNs are also different, as they generate no distributions or capital gains during the time it is held.  However, once the position is sold, redeemed or matured, there would be a capital gain or loss.

So far, Barclays is the only provider with ETNs in their iPath family, and they are planning to roll out nine more.  There may also be some new competition for Barclays from other providers in the near future.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.