I'm sure ETNs are unloved on this forum, but some aren't all that
exotic but just stock funds such as INP. Finance Yahoo article
out many are issued by large Euro banks potentially are on the brink
of failure, and unlike ETFs you can lose all your money such as with
the Lehman issued ones a couple years ago.
I wonder if there is a quick way to confirm you own etfs and not etns
without plowing thru the prospectuses again. Anyway, I thought I would
give a heads up and plug finance.yahoo.com even though they just put
in a format change that I hate.
Mostly, though, they are either derivative-based (ie. futures)
or leveraged or inverse indices, not simple long-only asset-holding
indices. INP is an exception.
Sometimes there are advantages to the ETN structure
as opposed to the ETF or mutual fund structure. In particular,
that's the case with respect to tax treatment on certain kinds
of gains (again, for example, futures contracts). By tracking
an index rather than holding derivatives, and simply holding
the ETN long-term, gains which could otherwise have been taxed
unfavorably may be turned into long-term capital gains when
the ETN is ultimately sold. The downside, of course, is the
expenses which get lopped off - sometimes quite high - and
the fact that you are exposed to the credit of the issuer.
As noted in the article you linked to, folks who were on
the other side of such a note issued by Lehman got hurt
very badly a couple of years ago.
It's often noted in the *name* of the security. For example,
and this is a good one, the iPath DJ-UBS Commodity Index TR ETN
(symbol DJP) is an ETN.
Moreover, there are are other "ETF"-like securities
which track similar commodity indices, but several of them are
yet another flavor of pooled interest -- they are structured
as partnerships like US Commodity Index (ISCI) and buyers of
them may get K-1s for tax purposes and be hit with annual taxable
gains (at 60/40 long/short term) regardless of whether they sell
the fund and without having had any cash distributions along the
way. Again, the up-side to the ETN structure is avoidance of
most of these tax issues.
Another example, JPMorgan has an MLP-index-tracking ETN
for similar reasons, though less about tax costs and more about
administrative issues -- and they make it very clear that the
ETNs are "senior, unsecured obligations of JPM Chase&Co."
(Another advantage is that the ETN can go into an IRA, while
buying MLPs directly in the IRA may lead to problems with
Unrelated Business Income ("UBI") and potentially your IRA
would owe taxes.)
Anyway, there are certainly potential advantages to the ETN
structure which may offset the credit risk.
I'm not sure there's a "quicker" way - but I strongy recommend
that if you own something you know what it is. If you have
something in your portfolio and you're not sure if it's an ETN
versus a regular ETF versus a partnership "ETF", you probably
shouldn't have it in your portfolio.
is a great resource. Thanks for
posting that article. It's a great reminder for folks to
review their holdings and make sure they know what they
actually have and what risks they may be taking. Credit
risk against the issuer is something we rarely need to worry
about with typical mutual funds and ETFs, but it's a very
serious concern with ETNs.
David S. Meyers, CFP(R)