An ETN is very similar to an ETF
• both track index performance
• both have relatively minor expenses
•both offer better alert natives to mutual funds
These core differences is that ETFs function like a stock, commodity or futures contract.
The ETN functions very like a bond. It is essentially unsecured debt issued by a particular institution. It is held until maturity, very similar to a bond and when it reaches maturity it finally releases the value…
An important factor in the purchasing of an ETN is the issuer. Just like a bond, if the ETN’s under-writer were to go completely bankrupt, the investor would be liable for a complete default!
Another thing of note is that ETN’s track the performance of an underlying index very well. While ETFs cannot always track an index well, because they incur expenses as they are bought and sold. ETN’s do not create these same expenses…
As a result, their expenses are much likely to be far lower…
How Do They Work
ETNs are first issued by a bank.
They are very often based on the performance of an underlying commodity - futures contracts, forwards, physical commodities, or other commodity structures such as mining stocks…
When Investing - Look Out For Two Things…
Make sure the ETN is regulated to some degree. You would not invest in anything that isn’t property regulated, ETN’s should be no different. in Europe, the regularity guideline is UCITS III.
Look out for the pool of assets the ETN is secured against. The 2008 crisis stemmed from a mis-calculation of mortgage backed securities. Very unstable assets were labelled as Triple A. When investing in ETNs, make sure proper collateral is provided and you would be comfortable with that collateral…
One final thing to note, is the credit worthiness of the issuer. All public financial institutions provide their accounts to issue to investors on a year to year basis.
E.g. If a bank is issuing multiple ETNs and they have loans that represent 500% their earnings, you might think again before buying their ETNs.
This is the same for ETFs, where the financial position of the broker is incredibly important!!!
Good luck investing
Here are a few articles which explain everything very well: