Content area
Full Text
The year 2006 witnessed the introduction of a new breed of security: Exchange-Traded Notes (ETNs). In June of that year, Barclays launched the first two ETNs under the family name "iPath" - one known as the DowjonesAIG Commodity Index Total Return ETN (ticker: DJP) and the other known as the S&P GSCI Total Return Index ETN (ticker: GSP). Since that date, the iPath family has added 15 more ETNs, while other fund families have issued at least 63 ETNs, with more announced and on the way.
The ETN acronym itself seems to have created much confusion and misunderstanding. Many retail and institutional investors, popular press, and even academicians seem to consistently lump ETNs together with ExchangeTraded Funds (ETFs). As a simple example, Conover et al. [2009] report that including precious metals in one's portfolio can improve the risk-return profile of the portfolio and suggest that inclusion of precious metals in a portfolio can be achieved using ETFs or ETNs without making any distinction between the two securities. Their comingling of these investments without disclaimer about the differences is common. This unfortunate co-categorization is understandable in light of the acronym similarities. But while ETNs do share a few similarities with ETFs, they are very different in a number of critical respects.
Not surprisingly given the extremely recent genesis of ETNs, we can find no literature on the subject. Our objective is to provide the seminal descriptive introduction to ETNs. This article is divided into four main sections: 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 this introduction to ETNs is merited for at least two reasons. First, all agents (investors, advisors, and academicians) in the investing sphere can benefit from clarification regarding what ETNs really are and how they differ from ETFs. Second, we believe this new asset class represents a fertile area for research and hope our introduction will be a catalyst for further empirical research on the subject.
...