The Financial Industry Regulatory Authority is out with a warning on exchange traded notes in yet another public-relations setback for the ETN industry.
“Investors should understand that an ETN’s market price can deviate, sometimes significantly, from its indicative value,” FINRA said. “If the ETN is trading at a significant premium to its closing or intraday indicative value, investors might want to consider similar products that are not trading at a premium.” [Master Limited Partnership ETN Trading at Premium After Creation Halt]
ETNs are often grouped together with exchange traded funds, or ETFs, because both financial products are bought and sold on exchanges. However, they have several key differences such as credit risks. [ETNs are Not ETFs]
“ETNs are a type of debt security that trade on exchanges and promise a return linked to a market index or other benchmark. However, unlike ETFs, ETNs do not buy or hold assets to replicate or approximate the performance of the underlying index,” FINRA explained.
In other words, ETN investors are exposed to the credit risk that the issuer goes bankrupt. ETN issuers are financial institutions.