What is an ETN?
An Exchange-traded note (ETN) is an unsecured debt security that tracks an underlying index of securities.
ETNs are different from exchange traded funds (ETFs), which also track an underlying index of securities, but trade like a stock.
An ETN is often compared to a bond. However, rather than receiving an interest coupon, the value of the ETN fluctuates with the value of the underlying securities.
Investors can buy and sell ETNs and make money from the difference between the purchase and sale prices, minus any fees.
The tax treatment of ETNs is better than that of ETFs, as they are taxed at the long-term capital gains rate—more favourable than that of ETFs.
What is an ETF?
An Exchange Traded Fund (ETF) is a collection of securities traded on an exchange, like a stock.
ETF share prices fluctuate all day as the ETF is bought and sold; this is different from mutual funds. Mutual funds that only trade once a day.
ETFs can contain all types of investments including stocks, commodities, or bonds; some offer U.S. only holdings, while others are international.
ETFs offer low expense ratios and fewer broker commissions than buying the stocks individually.
But What is the Difference?
The two concepts are similar – both vehicles of investment: are designed to track underlying asset(s), maintain lower costs than mutual funds and trade on exchanges like stocks.
When investing in an ETF, you are investing into a fund that tracks the underlying asset.
Whereas ETNs are more comparable to bonds – an unsecured debt note. Just like a bond, an ETN can be held until maturity or sold at the buyer’s discretion.