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Client Alert: Exchange Traded Notes (ETNs) Defined


An exchange traded note, or ETN, is a type of unsecured debt security issued by an underwriting bank.  ETNs have a maturity date and are backed only by the credit of the issuer.

Exchange Traded Notes are different from other types of bonds and notes because ETN returns are based upon the performance of a market index.  There are no period coupon payments distributed and no principal protection exists for ETN investors.  In this respect, ETNs combine certain aspects of both bonds and exchange traded funds (“ETFs”).  For example, similar to ETFs, ETNs are traded on major exchanges during normal trading hours; however, similar to bonds investors can also hold ETNs until maturity at which time the issuer of the ETN will give the investor a cash amount that is equal to the principal amount.

ETNs are a relatively new product and can be extremely volatile and risky.   They can be illiquid, subject to early redemption at the issuer’s discretion, trade at a higher price than their underlying index and contain conflicts of interests.  Perhaps the most important factor to keep in mind before investing in an ETN is that the credit rating of the issuer can have a profound effect on the ETN’s value.  As such, the value of the ETN may drop dramatically due to a downgrade in the issuer’s credit rating despite no change in the underlying index.

If your stockbroker of brokerage firm recommended that you invest in an ETN and you lost money, please contact us today for a free consultation.  We have extensive experience in representing investors who have lost money in ETFs and ETNs.

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