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Written and copyright © 2011 by Thomas N. Bulkowski. All rights reserved.
This article discusses ETNs, exchange traded notes
What Are ETNs?
Until I read the February 2011 issue of Active Trader magazine ("Exchange-traded notes"), I would have corrected someone saying "ETN" when I thought they meant "ETF."
An ETF is an exchange traded fund.
An ETN is an exchange traded note. ETNs are the new kids on the block, having been created in 2006 by Barclays Bank, according to the article.
As you might have guessed from the name, ETNs trade debt instruments instead of stocks.
According to an earlier February 2008 article ("The ABCs of ETFs"), "ETNs are debt instruments, meaning the company offering the ETN is assuming all the risk for the product.
So if the company were to go bankrupt, the ETN would become worthless. This differs from ETF trusts because, while the company holding the trust could become insolvent, the trust would
still exist and could be managed by another firm."
That's an important distinction that investors in Lehman Brothers ETN discovered when Lehman failed in 2008.
ETNs are bought and sold like stocks and listed on the major exchanges. ETNs represent a promise by the issuer to deliver a specified return, and that return is disclosed
in the terms of the note. ETNs can expire, but often that expiration date is years into the future.
Because an ETN has a fixed return, it helps reduce the tracking error more common to ETFs, according to the 2011 article. Tracking error is the difference between the ETNs return
and the return of the underlying security.
Since ETNs are a comparatively recent invention, trading volume can be thin, so check that before investing.
-- Thomas Bulkowski
Written and copyright © 2011 by Thomas N. Bulkowski. All rights reserved. A man without religion is like a fish without a bicycle.
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