If you're new to investing, you probably have heard of the words ETF and ETN. In fact, it may have brought confusion on your part. Since they both have similarities, it can be quite confusing to know which is which. Moreover, you may be wondering which one is better between the two.
In general, Both ETF and ETN track an underlying asset. If you invest in an ETF, you invest in a fund that holds the asset it tracks. On the other hand, an ETN is more of a bond. It's an unsecured debt note issued by an institution. Moreover, it tracks an underlying index of securities.
Every investor must understand the difference between these two. This way, you'll better understand what each of these things means and how to deal with such.
Without further ado, let's get into it!
What is Exchange Traded Fund – ETF?
An Exchange-traded Fund or ETF is a type of security involving a basket of securities. Thus, it can be a collection of stocks that often track an underlying index.
Still, they can invest in any number of industry sectors. Or, they can use different kinds of strategies.
In practice, both ETFs and ETNs are quite the same. They track an underlying asset, and they have lower expense ratios than actively managed mutual funds.
Moreover, both the ETF and ETF can trade on the significant stock changes just like stocks.
What is Exchange Traded Note – ETN?
On the other hand, Exchange-traded Notes (ETNs) are types of unsecured debt securities. The ETNs track an underlying index of securities and trade on a major stock exchange like a stock.
With this in mind, you can already see the similarity between ETFs and ETNs. One thing to note is that the prices of ETNs fluctuate like stocks.
What is the difference between ETF and ETN?
The main difference between ETF and ETN lies under the hood. Here are some examples to give you a detailed explanation.
For instance, when you invest in an ETF, you invest in a fund that holds the asset it tracks. Thus, it can be stocks, bonds, gold, or even other commodities. Further, it can even be futures contracts.
One thing to note is that ETFs are larger in collective volume than ETNs. Still, like stocks versus bonds, the former receive more attention from investors. The reason is it's easier to understand.
In simple terms, you can say that ETNs are right for you if you have done your research and gained an adequate level of understanding about it. Without such, it can be quite challenging to navigate around the said investment.
In a nutshell, we can say that both ETFs and ETNs track an underlying asset. If you invest in an ETF, you also invest in the fund that holds that asset it tracks.
On the other hand, an ETN is more of a bond. It's an unsecured debt note issued by an institution. Moreover, it would require an appropriate amount of understanding to ensure investment success.
What is a better investment – ETF or ETN?
The old rule on investments says you should only invest in something you understand. If you follow such, then ETFs are a better choice.
People who invest part-time can easily understand products with stock-like characteristics. Thus, it's a better option for them to go for ETFs instead of ETNs.
ETNs carry bond-like characteristics, which means they can be a bit more complicated. For this reason, it's only appropriate that investors with enough knowledge would go for it.
In general, the most popular exchange-traded products are ETFs.
One of the most popular ETFs is the JP Morgan Alerian MLP Index ETN (AMJ). This ETF has an average volume of a little over 4.5 million shares. On the other hand, the SPDR S&P 500 (SPY) ETF has an average daily volume of over 168 million shares.
With this in mind, it clearly shows that investor appetite gears more towards ETFs than ETNs.
Summary
ETFs and ETNs have many similarities, but they also differ in many ways. In a nutshell, we can say that both ETFs and ETNs track an underlying asset. If you invest in an ETF, you also invest in the fund that holds that asset it tracks.
On the contrary, an ETN is more of a bond. It's an unsecured debt note issued by an institution. Moreover, it would require an appropriate amount of understanding to ensure investment success.
The choice between ETFs and ETNs can be quite intimidating at a glance. Since these two share many similarities, you may wonder which one is better.
Nevertheless, you should bear in mind that the best investment is the one that you completely understand. For this reason, always go with what you think suits you and what you understand most.
Published: 02/25/2021