Exchange Traded Notes

Lesson

Exchange Traded Notes (ETNs) are unsecured debt security types that track an underlying index of securities and trade on a major exchange like a stock. ETNs differ from Exchange Traded Funds (ETFs) as they do not hold the underlying assets. Instead, they are backed by the credit of the issuer, which means they carry credit risk. As a result, ETNs can be used to gain exposure to various asset classes, such as commodities, currencies, and emerging markets.

Practice Question #1

Which of the following best describes an Exchange Traded Note (ETN)?

A) A type of secured debt security

B) A type of unsecured debt security

C) A type of investment fund

D) A type of stock

Select an option above to see an explanation here.

A) ETNs are unsecured debt securities, not secured. B) Correct, ETNs are a type of unsecured debt security that tracks an underlying index of securities. C) ETNs are not investment funds; ETFs and mutual funds are examples of investment funds. D) ETNs are not stocks but trade on exchanges like stocks.

Terms

ETN:: Exchange Traded Note, a type of unsecured debt security that tracks an underlying index of securities.

Practice Question #2

What is the primary difference between an Exchange Traded Note (ETN) and an Exchange Traded Fund (ETF)?

A) ETNs hold the underlying assets, while ETFs do not.

B) ETNs do not hold the underlying assets, while ETFs do.

C) ETNs are traded on exchanges, while ETFs are not.

D) ETNs are not traded on exchanges, while ETFs are.

Select an option above to see an explanation here.

A) This is the opposite of the correct answer. B) Correct, ETNs do not hold the underlying assets, while ETFs do. C) Both ETNs and ETFs are traded on exchanges. D) Both ETNs and ETFs are traded on exchanges.

Do Not Confuse With

ETF:: Exchange Traded Fund, a type of investment fund and exchange-traded product that holds assets such as stocks, bonds, or commodities.

Practice Question #3

Which of the following risks is unique to investing in Exchange Traded Notes (ETNs)?

A) Market risk

B) Credit risk

C) Liquidity risk

D) Inflation risk

Select an option above to see an explanation here.

A) Market risk is associated with all investments, not just ETNs. B) Correct, credit risk is unique to ETNs because they are unsecured debt securities backed by the issuer's credit. C) Liquidity risk can be associated with investments, not just ETNs. D) Inflation risk is associated with all investments, not just ETNs.

Historical Example

In 2008, Lehman Brothers issued ETNs backed by the company's credit. However, when Lehman Brothers filed for bankruptcy, the value of these ETNs plummeted, and investors lost a significant portion of their investment due to the credit risk associated with the issuer.

Practice Question #4

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Example Series 65 Example Practice Question

Real-World Example

An investor who wants exposure to the performance of a specific commodity, such as gold, could purchase an ETN that tracks the price of gold. This would allow the investor to benefit from any increases in the price of gold without actually owning the physical commodity.