Exchange Trade Notes: What Are They?
So you might no all about Exchanges Traded Funds, but how about the new kid on the block: Exchange Traded Notes. Well, ETNs are quite different from ETFs, and this article will look at how.
An Exchange Traded Note is an unsecured promissory obligation issued by a financial institution. The return that is paid on the note is linked to a specified index. So really it is like a bond in that you are taking on the credit risk of the issuer, and like an Exchange Traded Fund in that you get the returns of an index. It is unlike a bond in that the coupon is variable, and it is unlike an Exchange Traded Fund in that there is no tracking error. So you eat some credit risk to eliminate tracking error.
Just like an Exchange Traded Fund, an Exchange Traded Note can be bought and sold during the day. An Exchange Traded Note has a fixed maturity date. Since companies can issue ETNs based on any index they offer access to a broader range of markets than ETFs.
Although ETNs do not have a tracking error they still trade at premiums and discounts to their indicative Net Asset Value (NAV). Where there is a steep discount you can take this as an indication that the market is concerned about the company's credit worthiness. However, with that said it is worth noting that the Lehman ETNs tracked their index with barely any discount right up to default.
Up until the advent of Exchange Traded Funds certain asset classes were the preserve of the institutional investor, but now the individual too has access to commodities, currencies and a wide range of foreign markets.
When you invest in Exchange Traded Funds it is important to remember that you have no claims on the underlying assets of the investment, and that ETNs are regulated by the Securities Act of 1933, not by the Investment Company Act of 1940 which controls ETFs.
When it comes to taxation, ETNs only incur a taxable event when an investor sells their shares. If the shares are held for less than a year this is ordinary income, if it is for more than a year then this is treated as long term capital gains. - 23162
An Exchange Traded Note is an unsecured promissory obligation issued by a financial institution. The return that is paid on the note is linked to a specified index. So really it is like a bond in that you are taking on the credit risk of the issuer, and like an Exchange Traded Fund in that you get the returns of an index. It is unlike a bond in that the coupon is variable, and it is unlike an Exchange Traded Fund in that there is no tracking error. So you eat some credit risk to eliminate tracking error.
Just like an Exchange Traded Fund, an Exchange Traded Note can be bought and sold during the day. An Exchange Traded Note has a fixed maturity date. Since companies can issue ETNs based on any index they offer access to a broader range of markets than ETFs.
Although ETNs do not have a tracking error they still trade at premiums and discounts to their indicative Net Asset Value (NAV). Where there is a steep discount you can take this as an indication that the market is concerned about the company's credit worthiness. However, with that said it is worth noting that the Lehman ETNs tracked their index with barely any discount right up to default.
Up until the advent of Exchange Traded Funds certain asset classes were the preserve of the institutional investor, but now the individual too has access to commodities, currencies and a wide range of foreign markets.
When you invest in Exchange Traded Funds it is important to remember that you have no claims on the underlying assets of the investment, and that ETNs are regulated by the Securities Act of 1933, not by the Investment Company Act of 1940 which controls ETFs.
When it comes to taxation, ETNs only incur a taxable event when an investor sells their shares. If the shares are held for less than a year this is ordinary income, if it is for more than a year then this is treated as long term capital gains. - 23162
About the Author:
If you are interested in what an ETF Analyst has to write about ETFs, ETNs and other money products then go to: http://hubpages.com/hub/ETF-Analyst-Leveraged-ETFs-are-Toxic
posted by X - Men @ 7:54 AM
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