Most people are familiar with Exchanges Traded Funds, but Exchange Traded Notes is a new one for many of the folks on Main Street. So just what are these ETNs, and how do they differ from ETFs?
An unsecured promissory obligation issued by a company is a bond, and you buy a bond making a bet that the company will pay the interest that it promises during the life of the bond. Exchange Traded Notes are unsecured promissory obligations that are issued by financial institutions, and rather than offering a fixed rate of interest they are offering you a return that is linked to an index. In return for taking on the credit risk you track an index with zero 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.
If you decide that this is the asset class for you, then keep an eye out for Exchange Traded Notes that trade at a discount to their indicative Net Asset Value as this is a sign that they may be a credit risk. This alone is not a foolproof method, and the only real way to evaluate the credit risk is to engage in fundamental research into the issuer.
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. - 29950
An unsecured promissory obligation issued by a company is a bond, and you buy a bond making a bet that the company will pay the interest that it promises during the life of the bond. Exchange Traded Notes are unsecured promissory obligations that are issued by financial institutions, and rather than offering a fixed rate of interest they are offering you a return that is linked to an index. In return for taking on the credit risk you track an index with zero 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.
If you decide that this is the asset class for you, then keep an eye out for Exchange Traded Notes that trade at a discount to their indicative Net Asset Value as this is a sign that they may be a credit risk. This alone is not a foolproof method, and the only real way to evaluate the credit risk is to engage in fundamental research into the issuer.
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. - 29950
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