ETF cousins

Although most exchange-traded funds (ETFs) share a common structure (how ETFs work), several classes of securities often compared to ETFs have very different structures. Be sure to understand these differences before buying any of these securities.

  • Exchange-Traded Notes (ETNs). ETNs, a new class of securities offered by Barclays, are similar to ETFs in that they trade on exchanges and aim to track the performance of indexes. But unlike ETFs, ETNs are structured as debt securities, not actual stakes in the underlying assets (they promise to pay investors the return of the underlying index less an annual fee). Although ETNs may track the underlying indexes slightly more accurately than ETFs, and are potentially more tax-efficient than ETFs in some cases, ETN investors must also assume some credit (default) risk because of the debt security structure.
  • Closed-end funds. Like ETFs, closed-end funds trade on exchanges throughout the day. But unlike ETFs, they are typically actively managed (not index-based) and sell only a fixed number of shares at their public offering. Since they don’t have an in-kind redemption mechanism (more) like ETFs, they frequently trade at a significant discount to their underlying NAVs (Net Asset Values) and may be more vulnerable to short term supply and demand swings.