Exchange Traded Notes: An Introduction

Abstract:     
The first Exchange Traded Note (ETN) was introduced in 2006. Since then, at least 64 other ETNs have been issued, with more announced. This financial security, which is growing in number and popularity, is often confused with Exchange Traded Funds (ETFs) and seems to be largely misunderstood by the general investing public and even by institutional investors and academicians. Since no academic work has been published on the subject, our paper offers a seminal introduction to ETNs. We provide five basic categories of information related to ETNs: (1) descriptive information about ETNs, (2) fine print related to ETNs that we believe investors should understand before purchasing shares, (3) a few simple examples of ETNs that are available, (4) a simple analysis of how closely ETN market prices track their indicative values (something akin to NAV) and (5) a discussion of why ETNs may appeal to various investor classes. We believe our work will help investment professionals, individual investors, and academicians better understand ETNs, and we believe our work will also provide the catalyst for much future empirical work on these financial securities.

Number of Pages in PDF File: 19

Keywords: exchange-traded notes, ETNs, exchange-traded funds, tracking error, risk and performance, active management

JEL Classification: G10, G11, G12, G14

Accepted Paper Series