What Drives the Market for Exchange-Traded Notes?

95 Pages Posted: 17 May 2016 Last revised: 14 Nov 2019

See all articles by David A. Rakowski

David A. Rakowski

University of Texas at Arlington

Sara Shirley

Middle Tennessee State University

Date Written: November 1, 2019

Abstract

Exchange-traded notes (ETNs) are a relatively new form of security design that appear similar to exchange-traded funds (ETFs), but with no underlying portfolio holdings. We identify those characteristics of ETNs that are distinct from ETFs, and we test which ETN characteristics are most associated with interest from investors. We find that some ETNs have return patterns that are not spanned by ETFs, while other ETNs employ different strategies to attract investors. We show that the market activity for ETNs is associated with the distinctiveness of ETN returns, improvements in tracking errors, access to leverage, and the extent of risk transformation that ETNs allow.

Keywords: Exchange-traded notes (ETNs); Exchange-traded funds (ETFs); Financial innovation; Investor demand; Mean-variance spanning; security design; exchange-traded products (ETPs); tracking error

JEL Classification: G10, G19, G23

Suggested Citation

Rakowski, David A. and Shirley, Sara, What Drives the Market for Exchange-Traded Notes? (November 1, 2019). Available at SSRN: https://ssrn.com/abstract=2779952 or http://dx.doi.org/10.2139/ssrn.2779952

David A. Rakowski (Contact Author)

University of Texas at Arlington ( email )

Box 19449 UTA
Arlington, TX 76019
United States

Sara Shirley

Middle Tennessee State University ( email )

Murfreesboro, TN 37132
United States

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