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July 12, 2012 at 07:11 AM
Exchange-traded notes (ETNs) have been grabbing headlines recently, as CNN Money reported on how they’re less investor-friendly than other possibilities. As a result, FINRA wants to make sure that investors are aware of the differences between them and other, perhaps more traditional, investments—lest they be taken unaware and get in over their heads. To that end, it has issued an investor alert to educate people about their benefits and pitfalls.
While ETNs are unsecured debt obligations of the issuer—typically a bank or another financial institution—they are different from traditional bonds in a number of ways. This week AdvisorOne takes a look at what you should know before you buy ETNs; in the next slideshow we’ll explore some risks to avoid once you’ve bought them.
1. Who’s Your Daddy—er, Issuer?
Once you know who’s issuing the ETN, be sure to check out the ETN issuer’s credit rating and financial situation. If the issuer is publicly traded, use the SEC’s EDGAR database. Remember, ETNs are not registered investment companies and therefore are not subject to the same registration, disclosure and other regulatory requirements as most ETFs or mutual funds. If daddy’s pockets are empty, yours may be soon too.
2. Returns Relative to What?
You might expect that an ETN would correlate to the S&P 500 or some other equally well-known benchmark, but that’s not necessarily the case. If the ETN you’re considering involves tracking the index or benchmark of an unfamiliar market or asset class, make sure you educate yourself sufficiently to be able to know the market or asset and to understand the risks.
3. When Your ETN Says, “Call Me, Maybe”
