An exchange-traded note (ETN) is a senior unsecured debt obligation designed to track the total return of an underlying market index or other benchmark, minus investor fees. They can offer investment exposure to market sectors and asset classes, which may be difficult to achieve in other investment types with the same level of cost-efficiency, and they can act as an effective hedging tool.
How Do ETNs Work?
An ETN allows individual investors to buy an obligation, which is traded on an exchange. ETNs may be linked to a wide variety of assets. Today there are many types of ETNs linked to indices and/or single reference assets based on a variety of products such as commodity futures (e.g., energy, grains, industrial metals, livestock, and petroleum), foreign currencies (e.g., Euro, yen), and equities (grouped by such categories as industry sector, strategy or geographic location).
ETNs are similar to exchange-traded funds (ETFs) in that they’re listed on an exchange and can be bought and sold throughout the trading day. The issuer of an ETN is obligated to deliver the index or asset performance (less fees) in cash upon early repurchase or maturity. An investor generally may initiate early repurchase of an ETN when tendering a sizeable minimum amount of securities as specified in the prospectus (either dollar value, such as two million dollars, or number of notes, such as 50,000 notes). Early repurchase may be elected on either a daily or weekly basis, as provided in the prospectus. It is also important to note that the early repurchase feature does not eliminate the credit risk associated with this type of investment. Early repurchase is not available to investors for less than the specified minimum. It’s important to review the relevant prospectus on this point, since this could have an impact on an ETN's liquidity.
ETNs are not rated, but are tied instead to the creditworthiness of the issuer. Thus, the issuer’s credit rating is an important consideration for ETN investors. Typically, ETNs have a repurchase feature, providing qualified investors, known as authorized participants, the election to redeem notes of at least a specified minimum denomination or value with the issuer on a daily or weekly basis at a predetermined price. Individual investors, not qualified for redemption election, can purchase or sell their ETNs in the secondary market, sell at a specified issuer call event, or allow them to mature.
What do ETNs offer investors?
ETNs track, exactly, the performance of their underlying market benchmark
ETNs are open-ended securities, and therefore are not limited to on-exchange volumes
ETNs are traded and settled on a stock exchange, the same as any equity, and can be purchased and held in ordinary brokerage or custodial accounts
- Ease of Ownership
ETNs do not involve any of the difficulties with buying and then managing a futures position (eg. worrying about margin calls, contracts expiring and rolling positions) or in buying and storing physical assets.
ETN pricing is based on a transparent formula with the pricing updated daily by the issuer
ETNs are priced using published settlement prices
Investors can long or short ETNs