Introducing Exchange Trade Notes
So you might no all about Exchanges Traded Funds, but how about the new kid on the block: Exchange Traded Notes. Well, ETNs are quite different from ETFs, and this article will look at how.
An unsecured promissory obligation issued by a company is a bond, and you buy a bond making a bet that the company will pay the interest that it promises during the life of the bond. Exchange Traded Notes are unsecured promissory obligations that are issued by financial institutions, and rather than offering a fixed rate of interest they are offering you a return that is linked to an index. In return for taking on the credit risk you track an index with zero tracking error.
An ETN has a stated maturity date, and like an ETF they can be bought and sold throughout the day. ETNs provide investors access to an asset classes that does not always have an alternative in the world of ETFs, as the issuers are free to select any index on which to base their product.
You will see that Exchange Traded Notes trade at premiums and discounts to their indicative Net Asset Value, or NAV. When you come across one of these products that is trading way below its NAV then you can take it as a sign that the market believes there is a credit risk. However, with that said, the ETNs that were issued by Lehman Brothers didn’t trade at a discount at all. Then they went belly up.
Up until the advent of Exchange Traded Funds certain asset classes were the preserve of the institutional investor, but now the individual too has access to commodities, currencies and a wide range of foreign markets.
In terms of regulation you should note that ETFs are subject to the Investment Company Act of 1940, whereas ETNs fall under the Securities Act of 1933. There are two main differences that result from this, one is that the ETN can offer access to more exotic assets, and the second is that an investor in an ETN does not have any claim to the assets that constitute the index, whereas the investor in the ETF does.
Holding ETNs for more means that any profit will be treated as long term capital gains, but if you sell them in under a year then any gains will be taxed as ordinary income.
If you are interested in what an ETF Analyst has to say about ETFs, ETNs and other financial products then read: http://hubpages.com/hub/ETF-Analyst-Leveraged-ETFs-are-Toxic