However, there are caveats that ETN investors should be aware of. ETNs are debt securities issued by financial institutions that promise to pay the return of an index, minus fees and taxes. Therefore, investors are exposed to the credit risk or the possibility the underwriting bank goes bankrupt. The note can be vulnerable if the issuer gets into financial trouble, otherwise known as a default. With an ETN, an investor can lose some or all of their investment if the ETN issuer goes under.
“As a result, the investor assumes the credit risk of the issuer of the note,” LaCorte added. “Most issuers of ETNs are large banks, so this credit risk is minimal. But investors should always keep in mind that when they buy an ETN, they are buying a bank note, not stocks and bonds.”
While current ETN issuers like Barclays and Credit Suisse are robust banks, investors should not completely write off the risks. Lemhan’s Brothers filed for bankruptcy in 2008, which dragged down its Opta ETNs as well.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.