Exchange Traded Notes are the latest financial product to hit the street, and they are quite different from Exchanges Traded Funds. They may have a similar name, but ETNs are more risky than ETFs.

An ETN is basically an unsecured promissory obligation, which is issued with the backing of a financial institution. They are really like bonds, but instead of giving someone a fixed rate of interest, or a coupon, they guarantee a return that is linked to an index. So it’s like an index tracker, with no tracking error, but with the risk that the financial institution issuing the ETN will not honor it. So now investors can choose between credit risk and tracking error. Of course a tracking error is a small loss, but credit risk can wipe you out completely. The Lehman shock is still fresh in investors minds.

An ETN has a stated maturity date, and like an ETF they can be bought and sold throughout the day. ETNs provide investors access to an asset classes that does not always have an alternative in the world of ETFs, as the issuers are free to select any index on which to base their product.

If you decide that this is the asset class for you, then keep an eye out for Exchange Traded Notes that trade at a discount to their indicative Net Asset Value as this is a sign that they may be a credit risk. This alone is not a foolproof method, and the only real way to evaluate the credit risk is to engage in fundamental research into the issuer. [youtube:PIRI8SsBrxo;[link:Introduction to Exchange Traded Funds];http://www.youtube.com/watch?v=PIRI8SsBrxo&feature=related]

The unique structure of the ETN allows providers to replicate a wide range of asset-allocation strategies across commodities, foreign markets, and currencies. This means that individual investors can enjoy the benefits of accessing markets that before the advent of ETNs were only open to rich clients.

When you invest in Exchange Traded Funds it is important to remember that you have no claims on the underlying assets of the investment, and that ETNs are regulated by the Securities Act of 1933, not by the Investment Company Act of 1940 which controls ETFs.

Any profits in ETNs are of course taxable. They are taxable as ordinary income if you hold them for less than a year, and they are taxable as long terms capital gains if you hold them for more than a year.

If you are interested in what an ETF Analyst has to write about ETFs, ETNs and other money products then : http://hubpages.com/hub/ETF-Analyst-Leveraged-ETFs-are-Toxic

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