Jason Ware, global market strategist at Albion Financial Group, though, believes that since the index investment isn’t restricted to owning actual futures contracts or securities, the ETN product should cost investors less and provide easy access to niche markets.
“The ETN format allows near-perfect index tracking as long as the provider keeps their promise and all the costs are fully transparent,” Ware said in the article. “Unfortunately, that doesn’t always prove to be the case.”
Morningstar analyst Samuel Lee warned that ETNs may not appear as they initially seem. ETNs may include additional charges that add up to expense ratios typically seen in actively managed funds. Additionally, Lee notes that ETNs include instruments that could make the funds diverge from their benchmarks. For instance, after Credit Suisse stopped new issuance on its TVIX ETN, the fund acted like a closed-end fund. [Morningstar Warns on ETN Fees]
“The risk in dealing with ETNs is that difficult-to-understand cost structures can prove at key inflection points in a market cycle to be a bigger drag on performance than an investor might expect,” Jack Ablin, chief investment officer at BMO-Harris Private Bank, said.
For more information on exchange traded notes, visit our ETNs category.
Max Chen contributed to this article.