ETFs vs. ETNs: What Investors Need to Know - YouTube

A comprehensive look at trends,

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exploring ETFs.

ETFs versus ETNs,

there is a difference, and we're

going to find out what that

difference is now with our

ETF research director, Neena Mishra,

who joins me.

These ETNs have been in

the news lately.

You've been quoted in some stories

on different news outlets about

this very topic.

But they've been in the news

because of something that

maybe not so good.

Yeah, unfortunately, for negative

reasons, they have been a news.

Last week, Credit Suisse

delisted two of its ultra

popular exchange traded notes,

take you UTI

and WTI.

And that surprised or shocked

investors because usually

sponsors liquidate the fund

only if there is not enough investor

interest. But in this case,

and these two funds had almost one

point nine billion in assets under

management, that's why it

shocked investors.

So I thought this would be a good

time to understand the differences

and risks associated

with exchange traded notes.

Sure, because investors confuse the

two probably routinely, probably

more than we know.

Yeah, yeah. All right.

So let's start at the beginning

then. What are these

ETNs or Exchange Traded Notes?

So exchange traded notes are

ETNs are basically unsecured

debt instruments issued

by a major bank or a financial

institution.

And unlike ETFs,

ETFs actually hold

the securities which

comprise the index that they track,

ETNs do not hold any security.

Only the ETN issuer

promises to pay

investors the amount

which is reflected by indexes

performance, minus the fees

charged by them.

All right. And I'm sensing here,

just by the tone of your voice, that

there are some risks associated with

ETNs.

Yes. Uh, so, uh, because

as I mentioned, that they are

unsecured debt.

So first there is credit risk

on the issuer.

So if the issuer goes bankrupt,

there is a chance that investors

may not receive the full proceeds

back. And that actually happened

when Lehman went bankrupt

in 2008, some investors

lost some money.

So there is credit risk and then,

uh, maturity date because these

are, again, debt instruments.

So they have a maturity date,

which is typically 30 years

from the date of issuance.

But some of these notes have

a call feature as well so

they can be redeemed before

the

before the maturity date, just

like a bond.

Yeah. Yeah, exactly.

And then that is price

tracking risk.

Also, uh, normally

ETNs trade at fair prices, which

is then their market prices

are close to their intrinsic

values or any of these.

Uh, but there are many instances

when they trade at substantial

premium or discount

compared to their ENERIES.

And that actually happened

earlier this year in case

of a popular oil note with

the ticker . OIL .. oil ,

it for quite some time.

It was trading at almost

fifty percent premium to

its net asset value.

And in fact, Barclay's,

the issuer, issued a warning,

warning investors

about buying the note

when it is trading at a significant

premium to NAV.

Because if you buy when the note

is trading at a premium to

NAV and the premium crashes later,

then you you incur

unexpected losses.

Right?

So that can happen.

And then, uh, investors

sorry, sponsors can

liquidate the note

before maturity.

And if that happens, if they

liquidate or delist an

ETN, then the liquidity

associated with that note

is just going to vanish and

investors are going to find it very

difficult to trade that ETN.

And on the flip side, then, I'm

gathering ETFs don't have these

risk

ETFs actually hold those securities.

So they normally do not have any

of these risks that we mentioned.

OK, um,

providers decide to liquidate

nodes for a lot of various

reasons.

Right. Um, um,

so I guess it's buyer

beware with these ETNs.

Yes. Yeah.

Obviously they have to be aware of

all the risks associated with the

ETNs.

They can be recalled early, they can

be delisted.

So they could be priced tracking

at, uh, due to these,

these issues.

So when you buy an ETN you

have to be prepared for those kind

of risks.

But it's OK.

And the benefits though of of

ETFs are

it's a short list.

It's a short list.

So because they do not.

Any securities and they match

the performance of an index,

there is no tracking error

in case of ETFs because they

hold securities and sometimes

that the index comprises of too

many securities, like two thousand

securities, than the ETF will not

hold all securities.

They will just select some

securities, say five hundred

securities by a process called

sampling.

So that leads to tracking error, the

difference in the performance of the

index and the difference in

performance of the fund.

But in case of ETNs, there is no

tracking error.

And the second advantage is that

the ETN structure is

quite DACS friendly

and certain asset classes,

particularly commodities

and MLPs.

So in fact, MLP is

the only asset class

where I recommend

choosing ETNs over

ETFs because of their

tax efficiency.

OK, and I misspoke a moment

ago. I said benefits associated with

ETFs. It should have been benefits

associated with ETNs.

Yes, a short list.

OK, well, we thank you for that

little bit of education.

Don't forget, you can get

more information on ETFs

in the ETF section of Zacks.com.

And all you need to do to get there

is go right to the homepage, use the

funds tab in the top toolbar that

creates another dropdown window that

has an ETF in that

window. Click on it, takes you right

to it. With Neena Mishra I'm

Terry Ruffolo. End of video... Zacks Disclosure statement displayed..