Exchange-traded note

An exchange-traded note is an unsecured debt security issued by a bank or financial institution, designed to track the return of a specific market index, commodity, or strategy, and traded on a stock exchange throughout the day much like an ETF. Despite looking similar to an ETF on a brokerage screen, an ETN is structured completely differently underneath.

An ETF holds a basket of actual securities or assets, so its value comes directly from what it owns. An ETN, by contrast, holds nothing, it is simply a promise from the issuing bank to pay a return linked to the performance of a specified index, minus fees, at maturity or upon redemption. This means an ETN carries issuer credit risk that an ETF does not, if the issuing bank were to fail or default, holders of its ETNs could lose money regardless of how the underlying index performed, since there are no assets backing the note beyond the bank's own creditworthiness.

In exchange for taking on this credit risk, ETNs offer a benefit some ETFs cannot match for certain strategies, since they hold no underlying assets, they can track hard to replicate indexes, such as those involving commodities or complex option strategies, without the tracking difference or tax complications that can come from an ETF actually trading futures or physical holdings. Investors considering an ETN should weigh this structural tradeoff carefully, checking the credit quality of the issuing institution rather than assuming an ETN behaves just like a similarly named ETF.