Exchange-Traded Notes (ETNs)

An exchange-traded note (ETN) is a debt instrument that tracks the performance of a specific index and promises to repay the principal adjusted by applicable fees and index performance. Unlike exchange-traded funds (ETFs), ETNs are backed by the issuer.
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Definition

Exchange-Traded Notes (ETNs) are senior, unsecured debt securities issued by an underwriting bank. ETNs are designed to provide investors with a return that mimics the performance of a specified index minus investor fees. Unlike ETFs, ETNs do not hold a portfolio of stocks or other securities. Instead, their value is derived from the performance of the underlying index or benchmark they are designed to track.

Example

  • iPath S&P 500 VIX Short-Term Futures ETN (VXX): This ETN is designed to provide exposure to the S&P 500 VIX Short-Term Futures Index.
  • iPath Dow Jones-UBS Commodity Index Total Return ETN (DJP): Tracks the performance of the Dow Jones UBS Commodity Index.
  • Market Vectors Indian Rupee/USD ETN (INR): Tracks the exchange rate between the Indian Rupee and the U.S. Dollar.

Frequently Asked Questions (FAQ)

  1. How do ETNs differ from ETFs? ETNs track an index similar to ETFs, but unlike ETFs, they do not hold underlying assets. Instead, ETNs are debt securities, meaning your investment is subject to the credit risk of the issuer.

  2. What happens if the issuer of an ETN defaults? If the issuer defaults or goes bankrupt, the investor may not receive the promised return or even the principal amount of the ETN.

  3. Are ETNs subject to fees? Yes, ETNs typically have management fees and other investor fees that are subtracted from the returns.

  4. Do ETNs pay dividends? No, ETNs do not pay dividends. The returns are based purely on the appreciation of the underlying index or benchmark.

  5. Are ETNs traded on stock exchanges? Yes, ETNs are traded on major stock exchanges just like stocks and ETFs, providing liquidity to investors.

  • Exchange-Traded Fund (ETF): An investment fund that holds a basket of assets, like stocks or bonds, and trades on stock exchanges.
  • Debenture: A medium- to long-term debt instrument used by large companies to borrow money.
  • Index Fund: A type of mutual fund designed to track the performance of a specific index.

Online References

Suggested Books for Further Studies

  • “Exchange-Traded Funds and E-Mini Stock Index Futures” by David Lerman
  • “The ETF Book: All You Need to Know About Exchange-Traded Funds” by Richard A. Ferri
  • “Exchange-Traded Funds For Dummies” by Russell Wild
  • “Bond and Money Markets: Strategy, Trading, Analysis” by Moorad Choudhry

Fundamentals of Exchange-Traded Notes (ETNs): Securities Basics Quiz

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