As for ETFs, a study conducted by State Street Global Advisors at the Wharton School of Business concluded that 67% of investment professionals characterized ETFs as the most innovative investment vehicle introduced in the last decade. Another 60% stated that ETFs had “fundamentally changed the way they constructed investment portfolios”, reports Investing Daily on MinyanVille. [Investors Warned on ETN Risks]
On average, ETNs cost investors about 0.83% compared to ETFs that cost 0.57% on average, according to Lipper data. ETNs can beat ETFS when it comes to tax treatment. There are no periodic income or capital distributions, and gains are treated as capital gains, which can carry a low 15 % federal tax rate for holdings of more than one year. The treatment is subject to regulatory changes with the IRS, so be sure to double check these in the note prospectus.
An ETN is not going to outperform an index the same way an active ETF can. The note is promise to pay back what the index is doing, minus a management fee. So long as the provider remains healthy, a note can be predictable, although ETNs do have credit risks that ETFs avoid. [Key Differences Between ETFs and ETNs]
Tisha Guerrero contributed to this article.
