What is an ETN?

Exchange Traded Notes (ETNs) are a type of debt security, often issued by financial institutions like investment banks. The financial institution will issue ETNs to investors, who in return will pay a fee for using the investment. The ETN then aims to track the performance of a specific index like the FTSE 100.

Let’s take an example. If the FTSE 100 returned 5% in one year, and an ETN was designed to track the FTSE 100, then at the end of that year, the investor should in theory also receive a 5% return. This may differ slightly due to tracking error and any charges of the investment or account.

However, where ETNs differ to physical ETFs is that they don’t necessarily provide the investor with ownership of the securities from the index. Instead, the financial institution gets the flexibility to provide the return to match the index however they see fit. As a result, using the example above, the investor may receive a 5% return, without having ever owned the underlying securities from the index they wanted to track.

One of the biggest risks of using ETNs is that if the issuer of the ETN were to go bankrupt, the investor could lose all of their investment.

ETNs are complex investments and should only be traded by knowledgeable investors.

What is the annual charge on an ETN?

Most ETNs quote an ongoing annual charge figure. It’s important you read and review all important documents, including the KIID, of any investment you’re considering. You can find these via the HL website on the factsheet of each ETN.

You’ll pay an annual charge for holding ETNs with HL. Charges on this vary depending on the account the ETN is held in. Find more information on this, and other potential charges, on our charges page.

What are the risks associated with ETNs?

In addition to the risks associated by all ETPs, which can be viewed here, ETNs also encounter:

• Counterparty risk - this occurs when a third party is involved with some aspect of running the ETN. For example, the financial institution issuing an ETN. If the counterparty (the third party) ran into financial difficulties, there is a chance that the ETN and subsequently the investor could lose money. This could involve larger costs to the ETN, the ETN could cease trading temporarily or, in the worst-case scenario, be wound up altogether.
• Credit risk – as ETNs are unsecured debt instruments issued by an underwriter, there is a risk that if the issuing institution defaults, investors may lose some or all of their investment. The credit rating of the ETN issuer impacts the credit rating of the ETN.
• Issuance risk - unlike ETFs where the supply of shares outstanding fluctuates in response to investor demand, ETNs are created only by their issuers who are effectively issuing new debt each time they create additional units. At times, issuers may be unable to create new notes. Investors who purchase ETNs at a premium (which means they pay a higher price than the value of the note based on the performance of the underlying index or asset), are at risk of losing money when issuance resumes and the ETN stops trading at premium, or if the note is called by the issuer who returns only the indicative value.
• Redemption risk – if the issuer chooses to call their ETNs before maturity, then there is the risk that the investor will lose money if the sale price is lower than the purchase price.

Investors should understand the specific risks of an ETP before they invest, please see the KIID for full details.

What’s the difference between an ETF and an ETN?

Both ETNs and ETFs track an index but a physical ETF actually owns the underlying securities of the index. An ETN works like a bond issued by a financial organisation that pays out the return of the index over a period of time.