Exchange Traded Notes (ETNs) Are A Relative Of ETFs, But They Aren’t Clones

Exchange traded notes (ETNs) are beginning to gain popularity, as they allow financial advisors and investors to reach areas of the markets that were previously difficult to access.

The ETN offers access to exotic markets that are not completely suited to an exchange traded fund (ETF) or mutual fund. For example, the iPath Dow Jones AIG Cocoa Total Return sub-Index (NIB) can give investors access to a rich part of the commodities market.

One of the best benefits of owning an ETN is that they do not generate capital gains distributions and do not require a K-1 tax form. They are treated as prepaid forward contracts for tax purposes, reports David Hoffman for Investment News.

As of right now, the tax treatments for ETNs is being challenged, but many ETN providers are not swayed. They see the popularity of this debt instrument as a wonderful opportunity for everyone involved. As debt, ETNs are backed by the issuer, so you’re taking the risk that they won’t run into financial trouble. It’s an important thing for investors to be aware of in this climate of heavy losses by financial institutions.

ETNs don’t have to disclose their holdings on a daily basis, either.

As of mid-August, there were 92 ETNs on the market, 66 of which launched just this year. Providers say it’s too early to judge how successful they will be based solely on assets; it wasn’t until recently that they reached for a wider audience.

Other exotic ETNs:

• iPath MSCI India Index ETN (INP)
• E-TRACS UBS Bloomberg CMCI Food ETN (FUD)
• E-TRACS UBS Bloomberg Long Platinum ETN (PTM)
• Market Vectors Renminbi/USD ETN (CNY)
  

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