The general public is gaining awareness of exchange-traded funds (ETFs), but few have heard of exchange-traded notes (ETNs). That will likely change.

ETNs are similar to ETFs, but they take a different approach. Whereas ETF buyers own shares which represent a stake in a portfolio that holds a basket of assets, ETNs are long-term debt securities issues by the ETN parent company. They promise to pay investors the return of a particular index, minus fees. The good news is ETNs will track the market index. The bad news is it places credit risk on the investors.

To this point only iPath (of Barclays Global Investors) has offered ETNs. These have become popular because they track commodities, a hot area of the market. A few days ago, however, Lehman Brothers announced they are introducing a line of ETNs. Goldman Sachs is also a player. This almost insures that ETNs is where the market is going. Keep watch on this development and you heard it here first!

David Vomund
http://www.etfportfolios.net/