The downside of ETNs is the credit risk, which doesn’t appear in ETFs unless it holds an uncollateralized swap. [MLP ETNs: Another Source of Income?]
But the benefit of ETNs is that they don’t have any tracking error – they deliver the direct return of the index minus a fee. In addition, there are a number of products that can be brought to market as an ETN, but not as an ETF because of any number of factors – ‘40 Act restrictions, inefficient taxation and so on.
The Future of the Industry
Overall, Yeagley is pleased with how the industry has recovered from the troubled Lehman era – he estimates that ETN assets are at about 75% of where they would have been had the bank not collapsed.
Innovation should be coming ahead for the industry, as well. ETNs have a lower fixed cost than ETFs, therefore, ETNs don’t have to achieve the same level of assets under management in order to be economically viable for their sponsors. The general belief in the ETF industry is that a fund needs to hit at least $100 million in assets to be profitable. [ETN Is Another Way to Get Your Commodity Fix.]
Because ETNs have lower asset hurdles, issuers can be more aggressive in the products that they bring to market.
“More innovative products will come out in the ETN space,” Yeagley says. And by allowing big investment banks participate in the exchange-traded product market, “you’re increasing the number of competitors, which is always good for investors.”
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