What is an ETN? - Understanding Exchange Traded Notes

Money For the Rest of Us

J. David Stein

Investing, Investing Podcast, Business, Economics, Economy

4.5 • 1.4K Ratings

🗓️ 16 October 2019

⏱️ 28 minutes

🔗️ Recording | iTunes | RSS

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Summary

What are the benefits and risks of investing in exchange-traded notes (ETNs) compared with ETFs.

Topics covered include:

How big is the market for ETNs compared with ETFs.
How ETNs can do a better job tracking their target index than ETFs.
Why ETNs can be more tax-efficient than ETFs..
How ETNs have counterparty risk, pricing risk, and liquidity risk.
Under what circumstances would an ETN be preferred over an ETF.

Thanks to WIX and Policygenius for sponsoring the episode.

For show notes and more information on this episode click here.

[0:21] ETPs, ETFs, and ETNs—which is the most popular?
[3:10] Exchange-Traded Notes exhibit low tracking error.
[5:28] ETNs are vastly more tax-efficient than ETFs.
[6:14] Examples of Exchange Traded Notes.
[10:16] Should there be a default-risk discount on ETNs?
[13:34] Why there is issuance and closure risk with ETNs.
[17:21] Clarification on the term “Net Asset Value” when referring to ETNs.
[17:58] The issues of illiquidity risks and high fees.
[20:46] Exchange Traded Notes are a niche product.

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Transcript

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0:00.0	Welcome to Money for the rest of us. This is the Personal Finance Show on Money, How It Works, How to Invest It and How to Live Without Worrying About It.
0:10.0	I'm your host David Stein. Today's episode 273. It's titled What is an ETN?
0:17.2	Understanding Exchange Trated Notes
0:22.1	In a speech on September 8th, 2017, Michael S. Peeble War, Commissioner of the U.S. Securities and Exchange Commission,
0:31.0	stated, exchange-traded Products are among the most significant
0:35.7	financial innovations in recent decades and have shaped
0:39.2	financial markets as we know them today.
0:42.0	Exchange Traded Products, or markets as we know them today.
0:47.0	Exchange-traded products or E-TPs include exchange-traded funds, E-tifs for short,
0:51.0	and exchange-traded notesTS. ETS started ramping up in the mid
0:57.9	1990s while the first US-based ETN was introduced in 2006.
1:05.0	An ETF is a security that holds a basket of underlying securities such as stocks and bonds.
1:13.0	It's similar to an open-end mutual fund with a professional money management team that oversees a portfolio,
1:20.0	except that an ETF trades throughout the day on a stock exchange.
1:25.0	And E.T.N. also trades on an exchange, but it's an unsecured debt security, whose performance is tied to a specific financial index.
1:36.0	It's essentially a bond with a maturity date, usually 30 years or more, but unlike typical bonds it pays no interest, it just tracks a particular
1:48.0	financial index, and so the value of this note increases or falls based on the performance of the specific index.
1:58.8	Black Rock does a quarterly review of exchange-traded products in their second-quarter review they showed
2:05.9	that there are 5.6 trillion dollars globally in exchange-traded products. That compares to 1.1 trillion in 2009. In the
2:17.0	U.S. there are four trillion dollars in U.S. sponsored exchange
2:21.2	traded products that's across 2,435 ETPs.
2:27.0	That compares to 794 billion in 2009 where there were 925 ETP products. So ETP's they have been growing in popularity, but it's
	...

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