Exchange traded funds and exchange traded notes give investors asset allocation with targeted sector exposure. The choices that are available range from asset classes, commodities, currencies, sectors and bonds. Both funds and notes have launched that focus on the same areas, giving investors plenty of choices.
First, an investor should decide if an ETF or an ETN is their tool of choice. A fund tracks an index, or basket of stocks, and invests in equities or futures. A note, on the other hand, is a debt instrument, and the provider is responsible for the debt. An ETN can give investors specific exposure that a fund can not, with favorable tax treatment but credit risk that are inherent with notes can be unfavorable. [Key Differences Between ETFs and ETNs]
However, an ETN can offer benefits to an investor, and tracking error is not a problem when it comes to notes. [ETF Spotlight: Coffee]
“One solution to those problems (tracking error) is the ETN, or exchange-traded note, a relatively new product that combines characteristics of bonds and ETFs. It offers intraday trading, is theoretically immune to tracking error, and provides access to asset classes that are otherwise difficult for average investors to buy,” Chris Gay for US News reports.