Articles for Financial Advisors

ETNs

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ETNs

Exchange-traded notes represent ~1% of the exchange-traded marketplace; ETFs account for the other 99%. Part of the huge difference in market share is that ETNs have structural risk ETFs do not; ETNs are notes issued by institutional investors such as banks and brokerage firms. If the issuer does not live up to its obligation (repaying principal plus any credited gains), the investor can lose part or all of his/her principal, even if the underlying assets of the ETN have performed well. This is known as “counterparty risk” (think Lehman Brothers in 2008).

 
ETNs tend to have higher expense ratios than ETFs (0.8% vs. 0.6%). Because of the way fees are expressed in ETN documents, investors may not understand the full amount they are paying each year.
 
The ETN structure does have its pluses over ETFs: [1] virtually all ETNs are taxed like stocks, regardless of what the notes are tracking (currencies are an exception), [2] tax consequences are lower compared to MLPs—the largest ETN is the $5.5 billion JPMorgan Alerian MLP Index ETN, and [3] ETNs are not subject to tracking error.
 

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