Exchange Traded Notes (ETN)

February 13, 2007

The lastest Buzz word in the Stock Market is Exchange Traded Notes (ETN), which on the face seems similar to ETFs. However there are considerable differences in both of them.

Per Investopedia, ETNs are “A type of  unsecured, unsubordinated debt security”

  • ETFs are based on the profits or futures contracts while ETNs are based on Issuer Credit rating . Thus, the value of an ETN may drop even if there is no change in the index, instead due to down grade of the issuer’s credit rating.
  • ETNs are always taxable income.
  • ETNs have a risk of losing the principal money while this is not with ETFs

However  like ETFs the ETNs are also traded during the trading hours and the positive aspect of ETN is, an investor can also hold the debt security until maturity. At that time the issuer will give the investor a cash amount that would be equal to principal amount (depending on the day’s index).