The turmoil in financial and credit markets the past few years has put a focus on the credit risks of exchange traded notes. However, the creation and redemption feature of ETNs moderates some of the risks, analysts say.
ETNs are debt instruments issued by financial institutions that promise to provide the return of an index, minus taxes and fees. Exchange traded funds, on the other hand, represent a share of an underlying portfolio of securities.
The main credit risk of an ETN is that the issuer goes belly up.
“A topic that is often highlighted regarding ETNs is the credit risk associated with the issuer and any potential impact it may have on its price performance relative to its underlying index,” Wells Fargo analysts wrote in a recent report. “Although the ETN carries the credit risk of its issuer, we believe its redemption mechanism, when working properly, significantly reduces the duration of this risk.”