What is the difference between etf and etn

While the benefit of active management is arguable, there is no disputing the value that financial engineering has brought to the financial markets since deregulation took hold in the early s. Financial engineering has made our markets more liquid and more efficient. The creation of the ETN is a development all investors should learn about and consider adding to their portfolios.

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The Bottom Line. ETN: An Overview Exchange-traded funds ETFs have gained ground on mutual funds with their often-lower fee structure and easier-to-understand stock-like price action. Article Sources. Investopedia requires writers to use primary sources to support their work.

These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Articles. Partner Links. A commodity ETF is an exchange-traded fund that invests in physical commodities, such as agricultural goods, natural resources, and precious metals. ETPs trade on exchanges similar to stocks. ETFs can contain investments such as stocks and bonds.

Bond ETF Bond ETFs are very much like bond mutual funds in that they hold a portfolio of bonds that have different strategies and holding periods.

Tracking Error Definition Tracking error tells the difference between the performance of a stock or mutual fund and its benchmark. Investopedia is part of the Dotdash publishing family. Typically, they are constructed of futures, options, stock swaps, and other instruments to approximate the benchmark index return. However, the underlying foundation is irrelevant to the investor; if the bank's strategy fails to match the index, the bank is on the hook for paying off the rest of the gains to the investor.

ETNs bring the financial engineering technology of investment banks to the retail investor, providing access to markets and complex strategies that conventional retail investment products cannot achieve. For example, Barclays Bank in issued ETNs that allowed investors to profit from increases in stock market volatility and another ETN that allowed investors to profit from changes in the shape of the US Treasury yield curve.

Given the rapid implosion of the banking structure in the financial crisis, the credit risk issue should not be dismissed as irrelevant. Banks do collapse. The performance of ETNs over long periods can differ from the performance of the underlying index or benchmark. As described above, the ability to escape the short-term capital gains tax is one of the most compelling benefits to ETNs.

It's quite possible that the Internal Revenue Service may change the rules in a way that erodes the current benefit. The decision of whether to opt for an ETF or ETN in the same product area depends largely on your investment time frame. Given that ETFs are subject to yearly capital gain and income distributions which are taxable events to the holder—and ETNs are not—it seems reasonable to conclude that ETNs are a superior product for the long-term investor.

The irony is while ETNs offer tax advantages to long-term investors, the majority of ETNs offer access to more niche product areas that are not generally the recommended staple for long-term investors. There are about ETNs currently trading in the US and most are in the areas of commodities, currencies, emerging markets, and specific strategies.

An investor who wishes to diversify a core holding of stocks and bonds and gain exposure to these areas—for the long-term—might well consider ETNs because of the tax benefits. For an investor who is looking at various commodities or emerging markets to take advantage of shorter-term trends, there is little difference between ETFs and ETNs because the tax advantage is negated.

In those circumstances, it's generally better to opt for the product with the most volume and liquidity in order to achieve the best transaction prices. Many ETNs are intended for short-term trading and may not be appropriate for intermediate- or long-term investment time horizons. ETNs may be thinly traded, can become illiquid, and may trade at a market price significantly different a premium or discount from their indicative value.

ETNs may exhibit extreme market price movements, which can occur quickly and unexpectedly. Some ETNs are callable or redeemable by the issuer before their stated maturity date. ETFs vs. Other Investments. ETFs for Your Portfolio. Table of Contents Expand. Table of Contents. ETF vs. How Taxes Differ. ETNs to Watch. Learn about our editorial policies. Reviewed by Doretha Clemon. Article Reviewed July 07, Doretha Clemons, Ph.

Learn about our Financial Review Board. Key Takeaways Exchange-traded funds ETFs are shares in bundles of assets pooled together with a specified goal, such as to mirror the performance of an underlying index. Exchange-traded notes ETNs are shares of corporate debt, similar to bonds, with contracted rates of return based on the market performance of an index or other benchmark. Article Sources.