ETNs

An Exchange-Traded Note (ETN) is an unsecured debt security issued by a bank or other financial institution and designed to provide exposure to the performance of a reference index, commodity, currency, or trading strategy. Unlike an ETF, an ETN does not hold underlying assets; its return depends on the issuer's credit and the linked index’s performance, net of fees.

ETNs are listed on stock exchanges and traded throughout the day like stocks. At maturity or at an agreed settlement date, the issuer pays the holder an amount linked to the reference index's performance, minus any fees. Because ETNs are promises of payment rather than ownership of assets, they carry issuer credit risk.

Key risks include credit risk of the issuer, potential tracking error relative to the index, and liquidity risk if the note becomes hard to trade. Early redemption by the issuer, changes in tax treatment, and unexpected changes in the reference strategy can also affect value. Costs are embedded in prices.

Tax treatment and regulation vary by jurisdiction. In the United States, ETNs are generally treated as debt instruments for tax purposes, with gains and losses typically recognized on sale and distributions reported as ordinary income or capital gains depending on circumstances. Investors should consult tax professionals.

ETNs are often used to gain exposure to strategies or assets that are difficult to access via traditional ETFs, such as commodity futures, volatility indices, or leveraged and inverse strategies. They are distinct from ETFs, which actually hold assets; ETNs expose investors to credit risk of the issuer in addition to market risk.