Exchange-traded note (ETN).
In plain English
An exchange-traded note, or ETN, looks like an ETF, it trades on an exchange and tracks an index, but it is legally different. An ETN is an unsecured debt promise from a bank to pay the index's return at maturity. That means it holds no basket of assets; if the issuing bank runs into trouble or defaults, you can lose money regardless of how the index performed. ETNs can track hard-to-reach markets and have some tax quirks, but the credit risk of the issuer is the key difference from an ETF and is easy to overlook.
01Why it matters
ETNs behave like ETFs but add the risk that the issuing bank fails, so knowing the difference is what stops you from taking on credit risk you did not realize you had.
02The math, step by step
You hold an ETN tracking a commodity index. The index rises, but the issuing bank hits financial trouble, and because the ETN is just the bank's promise to pay, your investment can fall even though the index gained.
03What this is NOT
An ETN is NOT an ETF. An ETF owns a basket of assets; an ETN is an unsecured debt promise from a bank, so it carries the issuer's credit risk that an ETF does not.
04Receipts
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