Exchange Traded Note explained

on Nov 8, 2012 in Fixed Income, Home | 2,084 comments

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Exchange-traded notes (ETNs) are structured products that are issued as debt securities by banks and are linked to the performance of various assets, indexes or strategies. Though linked to the performance of an asset, ETNs are not equities or index funds, but they do share several characteristics of the latter. Similar to equities, they are traded on an exchange and can be shorted and similarly to index funds, they are linked to the return of a benchmark index.

When you buy an ETN, the underwriting bank promises to pay the amount reflected in the index or strategy upon maturity, like a bond investor would. Instead of being backed by the assets that are in the investment fund like ETFs are, ETNs are simply backed by the full faith and credit of the issuer.

For instance, if you buy an ETN covering oil and the value of oil appreciates during the time you are holding the ETN, your investment will consequently benefit from the uptrend and you will receive a higher payment at maturing.

ETNs have less than a decade history! The lack of tracking record could be a concern for investors who are considering adding ETNs to their portfolios. In addition, the investment and its return will depend on the bank ability to deliver what it has promised to investors. Better pray the bank will still be around 20 years from now!