Exchange traded notes (ETNs) were first created by Barclays Global Investors. Although they’re similar to exchange traded funds (ETFs) in some ways, they have some very key differences.
ETFs and ETNs can be considered kin in that they both trade on an exchange all day like a stock, follow an underlying index or product, and are accessible to all investors. Dave Goodboy for Trading Market says that both ETFs and ETNS can serve different investment needs, depending on your portfolio.
Here are some of their differences:
- ETNs are dependent upon the credit of the underlying bank; ETNs are a structured note, created as a senior debt note by a bank. This means if the bank goes under, you’ll have to get in line with the other creditors.
- Any tracking error in the ETN is paid for by the issuer; there’s no risk of tracking error on the part of the investor.
- ETFs can make yearly capital gains (although this is very rare) and income distributions. With ETNs, taxes are deferred until the note is sold or matures. (How ETFs and ETNs are taxed).
Read about more differences between ETFs and ETNs here.
For more stories about ETNs, visit our ETN category.
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.