Here you can find answers on the most common questions about Exchange-Traded Notes (ETNs). Also this instrument has a similar name to ETFs, it won’t be wise to think they are equal. Both ETNs and ETFs track an assigned and stated in the prospectus index, both are traded like a stock and many of them are very liquid (depends on the instrument and what do you compare with). The similarities between these two instrument stop there.

Yes, they have similarities but not more than that. Find out what is an ETN.

Also read Exchange Traded Fund (ETF) FAQ.

Exchange Traded Note (ETN) FAQ

1. What are ETNs?
2. Where are ETNs traded?
3. How can I buy and sell ETNs?
4. What’s the typical cost of an ETN?
5. Do ETNs pay dividends?
6. What kind of risks do I have to take into account investing into ETNs?
7. Why should I invest into ETNs?

Click questions in the list above to get to the point you are interested in.

What are ETNs?

ETNs are debt instruments. This is what you have to understand, this is what makes it different from ETF the most. ETNs are linked to the performance of a single asset (often commodity, currency) or index (for example, emerging market index). Being a debt instrument ETN do not make you a shareholder (if you buy ir), it makes you a creditor. Basically, the company which created the ETN promise you to track an index and to change the price of a ETN you got according to the index changes. For more information about ETN itself I recommend you to read another topic called “More on Exchange Traded Notes. Know the creature you hunt.”.
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Where are ETNs traded?

ETNs are listed and traded mainly in U.S. (NYSE Arca and NASDAQ list most exchange-traded notes), however you can find a lot of them in European and Asian markets. They can be bought or sold via a regular brokerage account.

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How can I buy and sell ETNs?

ETNs are listed and traded similar to other publicly traded securities. Therefore you can buy them throughout your brokerage account paying a regular fee as for a stock (of course it is usually so but not always, it is better to ask your broker about commissions). If you want to get money back you can sell it in the secondary market during trading hours, wait for the maturity date or redeem a large block of securities, typically 50,000 securities directly to the issuer.

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What’s the typical cost of an ETN?

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Do ETNs pay dividends?

Usually ETNs do not pay any interest or dividends because you, as was previously told, are not a holder of a security you are a creditor or an ETN issuer.

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What kind of risks do I have to take into account investing into ETNs?

ETNs comparing to the ETFs carry two risk categories – markets risk (as an ETF) and credit (issuer) risk which is connected with the credit worthiness of the financial institution backing the note. If the issuer’s financial condition is under the big question mark, it could negatively impact the value of the ETN, regardless of how its underlying index performs. If an ETN provider (issuer) will go bankrupt, the investor will not receive his or her investments.

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Why should I invest into ETNs?

Sometimes people say: “Good question, next question!” But I will answer. Access to some markets is very complicated or costs a lot. For example, investments into commodity futures leave a chance you will get several barrels of oil and what will you do with them? Or you want to invest into several small Asian or European countries and there is no access directly to the markets from you broker… Yeah, that’s why its better to use ETFs or ETNs. However, why ETN and not ETF? Well, ETN issuer follow the index, however it must not hold all the assets tracking index contain, therefore it allows to make ETN cheap (in the meaning of costs) and to have a small tracking error. More about ETF and ETN I recommend you to read in the article “Exchange Traded Funds (ETFs) vs Exchange Traded Notes (ETNs)”.
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Always understand what you are investing in.

Regards,

Nikita