After posting our March 10 blog on Exchange Traded Notes (ETNs), a reader posted a question regarding the advantage of ETNs over Exchange Traded Funds (ETFs). In truth, there are only small advantages and disadvantages to each form of security and as a shareholder you likely won’t notice any difference between the two.

The advantage of ETNs is that they eliminate tracking error between the security and the index that it follows. ETFs have some, albeit small, movement away from their underlying indexes. For buy-and-hold investors there may be a tax advantage in ETNs as you can defer capital gains and income until the day you sell your investment. Then again if you need income distributions then ETFs have the advantage.

The disadvantage of ETNs is that they are secured by senior debt notes. Although a company like Barclays with $1.5 trillion in assets is very dependable, it will never be as safe as a central bank. If Barclays and other ETN issuers are forced to close their doors then we’ll have more problems than our ETN holdings!

I treat ETFs and ETNs the same. If I’m looking to trade a commodity and an ETN choice has more liquidity, then that is where I’ll go. There is a good web site called ETNCenter.com with lots of good information on ETNs.

David Vomund
www.ETFportfolios.net