But that's where their similarities end.
Unlike ETFs, ETNs do not represent a claim on shares
of stock, bonds
or commodities. The ETN issuer
-- usually an investment bank
such as Morgan Stanley (NYSE: MS)
or JPMorgan Chase (NYSE: JPM)
-- may invest in the index companies to collect returns, but ETN holders like you and me don't have a claim on those assets.
Instead, ETNs are promissory notes. They are senior unsecured debt that promises to match the return of a specific benchmark
Like bonds, ETNs have a maturity date
. At maturity, generally 15 to 30 years from the issue date, the ETN is redeemed. Unlike bonds, however, you don't receive the face value
in cash. Instead, the amount you receive is based on the performance of the index. What you get at maturity depends on how well the index has performed.
But one of the features that may be attractive to many investors is that ETNs can help you avoid some potentially hairy tax issues.
As debt, ETNs distribute interest income that's taxable at your marginal income tax rate
. Although the income doesn't qualify for the reduced dividend
tax rate, you do receive a simple 1099-DIV form for the income you receive.