The difference between ETNs vs. ETFs

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A common question I get asked by friends interested in investing is "what is the difference between ETFs and ETNs?"

ETFs or Exchange traded Funds differ from ETNs - or Exchange Traded Notes. First we need to examine the similarities: both trade on stock markets like the TSX, NYSE or NASDAQ.

Both are very liquid, meaning that based on the volume you should be able to turn either to cash very rapidly. The similarities stop right there. I always try to warn my friends about the potential dangers of ETNs

ETFs are a very different animal from ETNs

ETFs are funds composed of many different stocks. Almost always the price of an ETF matches the NAV (Net Asset Value) or the stocks or other instruments it owns. This means, if the company running the ETF goes bankrupt, you will get back at least the price of their holdings (or the shares themselves).

ETNs on the other hand, is a an unsecured DEBT instrument. If these go bankrupt, you might lose your entire investment! They are a promise to you, as I understand it, to pay you for the underlying commodity (or whatever the ETN is tracking). They do not mean that you own the percetage of the underlying asset (eg. corn). This is why ETNs most often track commodities.

After the Lehman collapse, for instance, investor only got back/will get back pennies on the dollar of their investment! Whereas, if you ETF company collapsed and it held 20% MSFT shares 10% CSCO, 10% IBM etc. You would get back those ammounts in either cash or shares. This is why you need to be very careful and know what you are investing in.

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