ETN stands for an Exchange Traded Note and should not be confused with an ETF. It shares some attributes of Index Funds and Equities but differs from them significantly.
ETN is really a debt instrument and not an equity instrument, and that is what makes it different from ETFs and Index Funds. ETNs are issued by banks or other financial institutions and are a relatively new phenomenon. The first ETN was issued by Barclays Bank in 2006.
ETNs track an underlying asset and right now there are four type of ETNs:
- Emerging Market
Despite being a debt instrument; ETNs do not offer capital protection. Neither do they make any interest payments till maturity. Instead they track the price of the underlying asset. The redemption price that you pay depends on the price of the underlying asset.
There are two factors that impact the price of an ETN:
- The price of the underlying asset
- The credit rating of the issuing bank or financial institution
Since it is a debt instrument, the credit ratings make a difference in the valuation of the ETN. So the asset price may go up but the value of your ETN may still go down if the credit rating of the issuer is hit.
ETNs fall under the category of unsecured debt so the impact of credit ratings get accentuated on their price. Also, ETNs track an asset price but they don’t actually go out and buy the asset itself like ETFs.
We talked about the differences, let’s look at some similarities between ETFs and ETNs now:
- Both can be bought and sold in a stock exchange
- Both track the price of an underlying asset
The most important reason for the popularity of ETNs is their tax treatment. They are treated as prepaid agreements and as a result the gains from an ETN is taxed only at maturity.
On the other hand, the dividends from an ETF or the gains at the time of rollover are taxable at every instance.
This has been the primary reason for the growing popularity of ETNs.
There are two type of market risks that an ETN faces. One is the movement in the underlying asset prices. So an ETN that tracks oil prices will go down if oil prices were to go down.
The second market risk is the solvency of the issuer itself. If the bank which issued the ETN were to go down, then the ETN will be worthless too. This risk is absent in ETFs.
Then there is the question of liquidity. ETNs are relatively new and much smaller in size than ETFs. This poses some liquidity questions.
If you were to select between an ETN and ETF tracking the same asset, you need to consider two factors to make your decision.
- Your tax bracket and whether you are a long or short term investor
- The risk that the issuing bank carries
The last thing to keep in mind is that when you are buying an ETF, you are buying real assets, but when you buy an ETN, you are essentially buying a “promise by the bearer of the note”, since it is a debt instrument.
6 thoughts on “What is an ETN”
First of all, Thank you, You made financial information easier to access and made it available in sequence. You saved time of many educated/un educated investors from all noise outside.
I wish your site should rank among best financial know how portal keeping Indian investor in mind, one wish list, if all this content comes in regional language + If you add more pictorial representation, more table based data, it will be ‘cherry on the Cake’ .
Now My Question !
Many working professionals like me are pissed off due to uncertainty and inability to make fortune out of opportunity. Also Many have lost their hard earned money in quest to make X times returns.
If you were me .. (Me as described above)
What instrument would you recommend in this ever changing Era ?
If my aim is to make at least 30-40 % money from money I invested along with squeezing
return time to 2012 (15 months).
I did it all, been investor, booked profit in some script at multiple ‘X’, did not booked profit and hence in loss in some scripts, so all in all I did both trading as well as investment.
I am ready to take high risk(even ready for down side of 20 %), hence expect 30 + % returns.
I know no one can time market, yet there are people who made fabulous money in market no matter what.
I have very little trust on Indian MF industry, till now I only invested in ELSS (SBI Magnum Tax Gain and HDFC Tax Saver) and not at all happy with Indian MF houses as they seat on cash and end up not giving enough divident So lesser returns in investor’s pocket, hence investor’s money is not well utilized.(as per my view).
Awaiting for your view on instrument to be used for my goal of 40 % in 15 month ?
If I knew of a way to make 40% in 15 months consistently I would stop writing this blog and just do that instead. Unfortunately, I don’t know of such a way and am really skeptical that one exists as well. Anyway thank you for your kind words and all the best in your search.
There is a fair bit of info on ETFs in this section here: http://www.onemint.com/category/etf/
An introduction to ETFs can be found on the NSE website:
And here is a page about what an ETF is
There is an ETF category there that has good information.
i want to know more information for ETF.