Morningstar Warns on ETN Fees | ETF Trends

Investment researcher Morningstar was out with warning Wednesday on hidden fees charged by exchange traded notes, or ETNs.

Some financial institutions have “inserted egregious features in the terms of many ETNs,” says analyst Samuel Lee.

“The worst we’ve identified so far is a fee calculation that secretly shifts even more risk to the investor, earning banks fatter margins when their ETNs suddenly drop in value,” the Morningstar ETF analyst wrote in an article Wednesday.

ETNs are often grouped together with exchange traded funds, or ETFs, but Lee says the comparison is inappropriate.

Unlike exchange traded funds, an ETN is essentially an uncollateralized loan to an investment bank, with introduces credit risk. “ETNs are not registered under the Investment Company Act of 1940, or the ’40 Act, which obliges funds to have a board of directors with fiduciary responsibility and to standardize their disclosures,” he wrote.