What's the diff between ETF's and ETN's? I hear there are caveats to consider with ETN's
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Gedeond answered 4 months ago …
An Exchange-Traded Fund (ETF) is comprised of assets such as stocks or bands and trades around the same price as the net asset value of its underlying assets. ETFs are traded intraday like stocks, but pool assets like mutual funds. Most ETFs track an index, such as the NASDAQ-100 Index.
Exchange-traded notes are similar to ETFs in that they can track indexes, commodities, and bonds, but ETNs do not hold the physical underlying of the asset. ETNs are debt instruments issued by an underwriting bank and investors are buying corporate debt that instead of paying a yield, return the price performance of an index, commodity, bond, etc. Since ETNs do not hold the physical underlying, they are able to access less liquid markets which can be an advantage to investors looking at new investment opportunities.
But ETNs are debt instruments, investors of ETNs are subject to the same risk as bond investors of the issuing company. If an issuer of a ETN were to go bankrupt, the ETN investor would have the same rights as an equivalent debt holder in the bankrupt company. On the contrary if an issuer of an ETF were to go bankrupt, shareholders could still retrieve their holdings as they could be entitled to the underlying shares of stock held by the trust.
There are also different tax consequences for trading an ETN versus an ETF. I would recommend speaking to your financial advisor about either an ETF or ETN before investing.
