Exchange Traded Notes or ETNs

Exchange traded notes or ETNs are one new financial instrument available for investing. ETNs combine the features of Exchange Traded Funds (ETFs) and Mutual funds. Like ETFs, they are traded on exchanges and offer profit when the underlying index performs better. But unlike ETFs, ETNs are debt securities which have a maturity date.

Exchange traded notes are promises (bonds) issued by a bank, or other financial institution, that they will pay the cash back to the holder upon maturity with respect to the performance of a market index, minus applicable (investor) fees. Usually there are no interest/dividend payments until maturity. Unlike ETFs, when you are buying exchange traded notes you are not buying a portfolio of stocks or a portion of underlying index. You are just buying a promise.

The first ever exchange traded notes, iPath ETNs, were issued by Barclays Bank in June 2006. Now there are more than fifty ETNs, categorized as commodity ETNs, currency ETNs, emerging market ETNs and strategic ETNs available for investors. Exchange traded notes do not have tracking risk, but have counterparty or credit risk – the risk that result from poor credit rating or bankruptcy of the note issuer in future.

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