The New "Kid" On The Block
Just when you thought you understood the booming exchange-traded fund business, along comes the industry's latest offering - the excahnge-traded note (ETN).
Trying to figure out what makes ETNs different might prompt a bit of head-scratching but intrepid investors could find it worth the effort. For starters, like ETFs, the ETNs trade on an exchange with returns based on the performance of an index.
But technically speaking, an ETN is a kind of debt issued by a financial institution, similar to a corporate bond. The issuer promises to pay you the index's return, less fees. That's not the case with ETFs - an important distinction that leads to what's called "tracking error" and can amount to less money in your pocket.
Because of their structure, ETNs are also particularly well suited to investing in assets such as commodities and currencies. What's more, currency and commodity ETNs could be even more tax efficient than ETFs. Because dividends are lumped in with the returns, investors owe capital gains tax only when they sell the shares - a big advantage, since income from those assets is taxed at higher ordinary-income rates than when held in an ETF, mutual fund or individually.
The biggest ETN on the market currently is, Barclay's iPath/Dow Jones-AIG Commodity fund (DJP). The $1.9 billion security tracks a broad index of commodities futures. Barclays/iPath has also rolled out three ETNs to play the British pound, yen or euro.
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Trying to figure out what makes ETNs different might prompt a bit of head-scratching but intrepid investors could find it worth the effort. For starters, like ETFs, the ETNs trade on an exchange with returns based on the performance of an index.
But technically speaking, an ETN is a kind of debt issued by a financial institution, similar to a corporate bond. The issuer promises to pay you the index's return, less fees. That's not the case with ETFs - an important distinction that leads to what's called "tracking error" and can amount to less money in your pocket.
Because of their structure, ETNs are also particularly well suited to investing in assets such as commodities and currencies. What's more, currency and commodity ETNs could be even more tax efficient than ETFs. Because dividends are lumped in with the returns, investors owe capital gains tax only when they sell the shares - a big advantage, since income from those assets is taxed at higher ordinary-income rates than when held in an ETF, mutual fund or individually.
The biggest ETN on the market currently is, Barclay's iPath/Dow Jones-AIG Commodity fund (DJP). The $1.9 billion security tracks a broad index of commodities futures. Barclays/iPath has also rolled out three ETNs to play the British pound, yen or euro.
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posted by Bob Moser at
7:16 PM
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