With the flood of ETFS being brought to the market, there was bound to be a new product following along as a new alternative to ETFs to confuse investors even more.
Such an animal did arrive and it is called Exchange Traded Notes, or ETNs for short. I’ve been hard pressed to find information on it, but Kiplinger had an article called “Exchange-Traded Notes: The Next Big Thing?”
According to them, here’s the difference between ETFs and ETNs:
“Both ETNs and ETFs act like low-cost index funds. Their differences are under the hood. An ETF consists of a portfolio of securities (or sometimes a cache of gold or silver bullion), and owning a share gives you claim to a small portion of that portfolio. With ETNs, however, there is no portfolio. You get what is, in essence, a bond issued by the ETN’s creator, Barclays. The ETN promises to repay the amount of your investment plus (or minus) the return of the index that the ETN tracks, less a management fee.”
The benefit to some seems to be in the way distributions are handled:
“ETNs don’t pay cash distributions. Instead, the value of dividends, interest and investment gains is lumped into the funds’ total return. So you won’t face any taxes until you sell your shares. And even then, any gains on shares held more than a year should be taxed at 15%, according to a legal opinion Barclays obtained.”
So, if you are looking for monthly income, this would not be a good choice. The bottom-line is that this product is new and needs to prove itself over time. At this point, I don’t have an opinion either way, but simply wanted you to be aware that ETNs exist.