Exchange Traded Notes

Exchange-Traded Notes (ETN) are considered senior, unsecured debt securities. There is no coupon payment and no protection of the principal invested. Exchange-Traded Notes (ETN) track the returns of a particular market index, minus fees. Exchange-Traded Notes (ETN) are traded on market exchanges (i.e: NYSE, AMEX). There are Exchange Traded Notes (ETN) that track indices for the bond, stock, currency or commodity markets. There are hundreds of Exchange Traded Notes (ETN) offered by various investment outfits. Ipath, UBS, or Deutch Bank provide several Exchange Traded Notes (ETN) . The major advantage of Exchange Traded Notes (ETN) is that an investor can defer taxes on capital gains until maturity or when the Exchange Traded Notes (ETN) are sold. Indeed, unlike ETFs or mutual funds, Exchange Traded Notes (ETN) are not required to make annual capital gains or income distributions which are taxable to the investor. As a result, if the investor invests for a long enough period (i.e. greater than 1 year) then the investor would pay the long term tax rate. It is important to note however that the IRS ruled that this tax advantage does not apply to Exchange Traded Notes (ETN) that track currencies. Another important aspect of Exchange Traded Notes (ETN) is credit risk. Exchange-Traded Notes (ETN) are issued by an underwriting bank which will provide cash payment upon maturity, so unlike Exchange Traded Funds (ETF), holders of Exchange Traded Notes (ETN) are exposed to a potential default by the issuing bank. As a result, the value of Exchange Traded Notes (ETN) should be based on the value of the index it tracks and the credit rating of the issuing bank.

Cite Term

Definition Sources