Exchange Trade Notes (ETNs) pack a punch

Like ETFs, ETNs are traded like shares on the JSE and also track returns of benchmarks or indices similar to those tracked by ETFs. But get this: ETNs do not actually hold any securities in the benchmark they track. Mind. Blown.

Instead, an issuing bank promises to pay to investors the return reflected by the index’s performance minus their fees. Where an ETF would sometimes reflect a difference in value between its collection of shares and the actual one on the index it tracks (because it’s always buying and selling those shares to match the index which can cause a slight delay), an ETN is guaranteed to match the index exactly. But that guarantee doesn’t come for free (nuh uh!). Banks charge for the fact that they are guaranteeing the returns of the ETN. Technically that makes ETNs riskier than ETFs because if the firm which issued the particular ETN were to go bankrupt, investors might not receive their full investment back. But because an ETF actually contains all of those assets, even if the management firm went bankrupt, the fund investments would still be valuable.

Did you know that that means you can access commodities and certain foreign currencies through ETNs without buying the physical dollars, gold or oil? I sure didn’t. 

Because ETNs aim to provide you with exposure to exchange rates, commodities, bonds or shares which would be difficult and expensive to take part in otherwise. Exchange Traded Notes are not: shares, share-based securities or ETF’s. 

Here are some good-to-knows about Exchange Traded Notes (ETN’s)

• Benchmarking

ETN’s Track, EXACTLY, the performance of their underlying market benchmark

• Accessibility

They are traded and settled on the stock exchange, the same way a share or ETF is traded, can be held in your brokerage account and can be easily bought or sold. Because of the future contract structures, an ETN does have an expiry date, but these dates are 10 - 20 years from the date of purchase and at the end of the expiry date, you will get paid out at the ETN fair value at that time. 

• Ease of Ownership

ETNs do not involve any of the difficulties with buying and managing or storing physical assets like oil, gold or soft commodities. 

• What are the risks? 

Well, they are more riskier than ETFs. When an investor buys an ETN, the issuer promises to pay the amount reflected in the index, minus fees, upon maturity. This means that an ETN has an additional risk compared with an ETF. this is called counter party risk. 

The beauty of the ETN structure is that it can be linked to anything. There are ETNs that track hard to reach corners of the share market. They sometimes combine shares or bonds, or use other sophisticated strategies that would be difficult to package into a traditional ETF.

So, in short, if you are looking to have access to gold, oil, dollars and soft commodities without physically buying the underlying assets, Exchange Traded Notes could be your solution. 

Check out these ETNs available on EasyEquities:

Happy Investing! 

Waylon Smit 

Baskets and Bundles guru