Same Strategy, Different Wrapper
One of our favorite ETNs will soon be available as an ETF.
Those who follow the exchange-traded fund industry are well aware of the ETN structure's fall from grace during the ongoing global financial crisis. With once-venerable financial institutions collapsing left and right, we certainly understand why investors want to avoid the credit risk inherent with ETNs. After all, why would any (sane) investor take on additional credit risk during a global financial meltdown if there are suitable alternatives available?
Unfortunately, there isn't always an ETF that offers the same market exposure. This is attributable to the structure of the funds and the regulatory acts that govern the exchange-traded fund industry. Whereas ETFs are subject to the Investment Company Act of 1940, ETNs fall under the Securities Act of 1933. The major point here for investors trying to differentiate between ETFs and ETNs is that, with an ETF, the investor has a claim on the basket of securities held by the fund. ETN investors are promised the return of a given index but do not have any claims on the assets that constitute the index. This makes ETNs the structure of choice for difficult-to-access markets, less-liquid securities, and the construction of sophisticated asset-allocation strategies. For more info on the nitty-gritty of ETNs, please see our recent article, "ETNs Demystified."
John Gabriel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.