Finweek English Edition - - Cover Story Exchange-traded Funds -

Ex­change-traded notes (ETNs) are sim­i­lar to ETFs in that they track an in­dex, com­mod­ity or cur­rency. They are gen­er­ally only is­sued by banks. Ac­cord­ing to In­vesto­pe­dia, an ETN’s value is af­fected by the credit rat­ing of the is­suer, and the value may drop if the bank is down­graded even though there may be no change to the un­der­ly­ing in­dex.

Mike Brown of et­fSA says the bank’s credit rat­ing has no ef­fect. “It's the as­set that’s held in the ETN. ETFs are held in a trust, so the li­a­bil­ity is 100% cov­ered by phys­i­cal hold­ing in the un­der­ly­ing as­set. With an ETN, it is some­times not as easy to hold the un­der­ly­ing as­set, like corn or wheat, and th­ese may be cov­ered by, for ex­am­ple, fu­tures or for­ward mar­kets. This makes ETNs slightly more risky, but who­ever is is­su­ing that note is is­su­ing off of a bal­ance sheet, so you have to look at the un­der­ly­ing bal­ance sheet of the is­suer.”

That is why ETFs are in­her­ently more pop­u­lar, says Brown.

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