Exchange Traded Notes - SGX SIP Online Education Module

What are Exchange Traded Notes?

An ETN is a debt security (debt obligation) that is traded on exchange that is designed to track an underlying index like equity index, commodity price and currency rate.

The issuer of an ETN (investment bank) is obligated to deliver the index or asset performance (less fees) upon repurchase or maturity.

Returns on ETN

Returns on ETNs are based on the performance of the underlying index. ETNs do not:

• Provide regular coupon payments like bonds
• Pay interest
• Guarantee returns or return of principal

Risk factors

Investors are exposed to the credit risks of ETN issuers, who usually are unrelated to the issuers of the underlying assets. This is also known as issuer risk. Other general risks such as market risk and liquidity risk are also applicable to ETNs.

Similarities between ETFs and ETNs

• Security type:
  • ETF: Investment Funds;
  • ETNs: Debt Security
• Diversification:
  • ETFs: Varies, depending on the underlying index
  • ETNs: Varies, depending on the underlying index
• Dividend distribution:
  • ETFs: Yes, depending on individual ETF
  • ETNs: No
• Principal guaranteed:
  • ETFs: No
  • ETNs: No
• Expiry:
  • ETFs: No
  • ETNs: Generally yes
• Tracking error:
  • ETFs: Yes
  • ETNs: No
• Credit risk of issuer:
  • ETFs: No. Custody of fund assets are segregated from issuer’s assets. The liquid assets directly held by the fund are recoverable.
  • ETNs: Yes. ETNs are debt obligations owed by the issuer to investors.

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