Exchange-Traded Note

ETNs look similar to exchange-traded funds, but they work differently. An ETF holds the underlying assets, such as shares or bonds. An ETN does not hold any assets; it is a promise by the issuing bank to pay the return of the index, minus fees, at maturity or when redeemed.

For example, an ETN might track a commodity index or a volatility index, giving investors exposure to markets that are otherwise hard to access.

Because an ETN is a debt of the issuer, investors face credit risk. If the issuing bank fails, investors could lose some or all of their money, even if the index performed well. This happened to holders of some ETNs issued by Lehman Brothers in 2008.

ETNs often track their indices closely, without the tracking error that some funds have. However, some ETNs, especially leveraged or volatility products, are complex and suited mainly to short-term traders. Issuers can sometimes stop issuing new notes or redeem them early, which can cause their prices to move away from the index value.