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What are the differences between ETFs and ETNs?

by , 14 October 2015

If you've looked into exchange traded funds (ETFs), you may have come across exchange traded notes (ETNs).

So what are the differences between these two products? And what difference does it make to you as an investor?

Let's take a closer look…


Defining ETFs and ETNs


ETFs are baskets of shares or other assets that track the performance of a benchmark index or asset. To create these funds, fund managers buy the assets that make up the benchmark index or asset.

ETFs trade on the stock market just like shares.

ETNs also track the performance of a benchmark index or asset. But this is where they differ from ETFs. These ETNs don’t actually hold the assets. Instead they’re debt instruments that trade on the stock market, just like shares.

In return for buying the ETN, its issuer gives investors the return of its benchmark index or asset.


The difference to you as an investor buying ETFs or ETNs


When you invest in ETFs, you effectively own your portion of the fund’s assets. On the other hand, ETNs are essentially promises. And this carries an extra element of risk.

The additional risk that comes with investing in ETNs is if the issuer goes bankrupt or experiences financial problems. If this happens, you could see your investment in ETNs lose value.

If you’re looking to invest in ETNs, bear in mind that they’re riskier than ETFs as they are debt instruments and don’t have the backing of assets like ETFs do.

As with ETFs, if you want to invest in ETNs, you have a few options:

  • You can invest in ETNs through your stock broker;
  • You can invest in ETNs through an ETN provider; or
  • You can invest in ETNs through a platform such as etfsa.co.za.

So there you have it. The differences between ETFs and ETNs.

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What are the differences between ETFs and ETNs?
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