ETF (Exchange-Traded Funds) Vs. ETN (Exchange-Traded Notes): Know Everything About Them

ETF stands for Exchange-Traded Funds, and ETNs are Exchange Traded Notes. Are you aware of these investment classes? If not, you have landed on the right page, as this article covers both.

ETFs (Exchange-traded funds) and ETNs are investment assets, and people usually invest in these classes to gain returns over and above the principal amount invested. But both are different, have different risk aspects, and function differently.

Let us clearly understand these assets and make you wiser in making investment decisions.

What Is Exchange-Traded Fund?

An exchange-traded fund works like a mutual fund but has a higher liquidity. We can infer it as a “basket of securities” that invests in several underlying assets, such as stocks, debentures, gold, indexes (S&P/ TSX Composite Index), international securities, etc.

An ETF enjoys an elevated level of liquidity, as it is traded actively on a stock exchange and can be purchased and sold just like stocks.

Further, ETFs are highly flexible and can track anything from a specific stock to an extensive collection of securities to even some investment strategies.

What are the Different Exchange-Traded Funds?

With the evolution of the investment market, you cannot restrict ETFs only to the Stock Indexes. These have certainly progressed, and presently several ETFs are available in the market, and you can select one per your preference and risk appetite.

Common choice ETF schemes

Index ETF

It is one of the most popular schemes of ETF. An ETF tracks a particular stock index, such as S&P/ TSX Composite Index, S&P/ TSX 60, S&P/ TSX Small Cap, etc., and invests in all the index stocks.

Thus, an investor of an Index ETF will always get the index return with the index the ETF is tracking. It happens because an Index ETF invests in the stocks listed on the index, which it is tracking.

Gold ETF

Gold ETF is an alternative form of investment for gold investors who aspire to take advantage of the movements of the gold prices prevailing in the market. The current market price of a Gold ETF is like that of the present value of pure 24-carat gold.

Bank ETF

Unlike an index ETF that invests in the stocks of a particular index, a Bank ETF invests in the banking stocks listed on the stock exchange. This ETF has a defined ambit/ scope and revolves only around all the banking stocks.

International ETF

Investors naturally love to diversify their portfolios by adding several foreign securities to their investment plans. The International ETFs serve the needs of such investors, which invest only in foreign securities.

You will always see an International ETF tracking the global markets or the benchmark stock index it has targeted.

Liquid ETF

Several types of investors with varying risk appetites and return expectations make up an investment market. We can consider a liquid ETF a safe ETF since it invests in highly liquid instruments such as government securities, money market instruments, call money, short-term debt instruments, Treasury bills, etc.

What are the Exchange-Traded Notes (ETN)?

An exchange-traded note is the younger brother of ETF that has several similarities, but it is distinct in its way.

Like an ETF, an ETN also tracks a stock index, and its returns depend on the stock index it is tracking. Financial institutions issue these and are unsecured. If an ETN issuing organization goes bankrupt, it is next to impossible for ETN investors to recover their money.

Further, an investor of ETN does not get any interest/ dividend from its units of ETN. You can only enjoy the capital gains by trading it through:

• A trading platform

Or

• The Issuing financial institution

What Are the Unique Characteristics of Exchange Traded Notes?

Exchange-traded notes are like loan instruments as senior debt notes having fixed maturities (usually between 10 years and 30 years). An investment into this asset class will neither produce any interest nor fetch any dividend. An investor can only enjoy capital appreciation.

Let us have a look at its distinctive characteristics:

• No Asset Ownership: Unlike an ETF, which invests and holds the underlying securities, an ETN is limited to tracking and does not own the securities. For example, an ETN tracking the gold indexes will only track but buy no gold.
• Unsecured: The ETNs are unsecured debt instruments as they lack collateral that you can monetize in the event of default. An investor investing in the ETNs relies only on the reputation and creditworthiness of the issuing financial organization.
• Liquidity: Like ETFs, the ETNs also enjoy high liquidity, as they are actively traded on the stock exchanges and can also sell it back to the issuer.

Where Should You Invest? –ETFs or ETNs

Undoubtedly, ETFs are the more popular and preferred form of investment than ETNs, which are still in their nascent stage and experience a lower demand.

Both these products differ in the way they operate and provide varying returns. Since ETFs are more associated with stocks, which are easier to understand, invest in ETFs.

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