An exchange-traded note (ETN) is a senior, unsecured, unsubordinated debt security issued by an underwriting bank or by a special-purpose entity.
Thus an ETN has an additional risk compared to an exchange-traded fund (ETF); if the credit rating of the issuer is compromised, the investment might lose value in the same way that a senior debt would.
[6] Often linked to the performance of a market benchmark, ETNs are not equities, equity-based securities, index funds or futures.
That ETN tracked a basket of multiple securities traded on the Tel Aviv Stock Exchange.
ETNs could also be liquidated before their maturity by trading them on the exchange or by redeeming a large block of securities directly with the issuer.
Since ETNs are unsecured, unsubordinated debts, their risk is that of bonds of similar priority in the company's capital structure.
One reason of the tracking error observed in ETFs might be attributed to the diversification issues that stem from the inability of a fund to replicate an index due to an upper limit on the maximum asset allocation to a single stock.
The ETN issuer guarantees the holder a return that is an exact replica of the underlying index, minus expense fees.
The bank also agrees to pay large shareholders the exact value of the note on a weekly basis through redemption, which helps the ETNs track very closely to the underlying index return.
Unlike other buy-and-hold structured products, ETNs can be bought and sold during normal trading hours on the securities exchange.
But ETNs are different from ETFs, as they consist of a debt instrument with cash flows derived from the performance of an underlying asset – a structured product.
On the contrary, ETN provides opportunities to gain exposure to these types of investment strategies in a cost-efficient way.
[13] Such characteristics make ETNs suitable for experienced investors willing to take on additional risk in hope of a higher return.
ETNs, as debt instruments, are subject to risk of default by the issuing bank as counter party.