What is Exchange Traded Note?

Do you ever open your finance newspaper each morning and wonder what it would feel like to use your sharp foresight to invest in the stock market? You might believe that the American Dollar will only increase in strength over the next few decades or that gold will become more valuable in the future. If you think you have the market awareness, firm resolve and desire to invest in debt instruments then exchange-traded notes may be right for you.

What is an exchange-traded note?

An ETN is a type of debt instrument that is issued by a financial institution such as a bank. The ETN has a fixed maturity period that can range from 10 to 30 year. ETNs can be listed on stock exchanges such as the Bombay Stock Exchange and National Stock Exchange. They can be traded on the basis of supply and demand.

An ETN does not generate interest money like other debt instruments. Investors don't receive regular payments. Investor's gains and losses are determined by the performance of the asset, index, or asset class it tracks. Investors have the option to either sell their ETN before it matures or keep it until it matures in order to receive their returns.

Let's take an example to show what an ETN looks like. Let's say you believe in the future value of oil. An oil ETN tracks the price of oil on the stock market. You would invest Rs. 1,00,000. The ETN has a maturity period that lasts 20 years. The ETN's value increases by 10% after the expiration of these 20 years. You will get your principal amount of Rs. 1,00, 000 plus a 10% increase in Rs. You will receive your principal amount of Rs.1,00, 000 plus a 10percent increase of Rs. 10,000 The management fee will not be deducted from the total amount that you receive. If the ETN's value falls by 10%, it will be deducted from the principal amount and the management fee at the time you sell your units.

Characteristics for exchange-traded notes

An ETN may be a good option for the Bloomberg news-watching and Economic Times reading geeks. Let's look at the different attributes and features of exchange-traded note so you can consider it an investment option by the end.

Property ownership

An ETN doesn't hold any significant assets. They are simply tracked by the ETN. A gold ETN, for example, does not purchase any gold. It tracks the asset or a index to gold.

Unsecured debt

The creditworthiness of the borrower (the issuer), is what a investor relies on for repayment of their principal investment, plus any gains or losses. The ETN issuer does not offer collateral. Investors can sell the ETN to cover any losses.

Liquidity offered

ETNs can be traded on exchanges during trading days. Investors can also sell ETNs on the market if there is demand.

Expense rate

Exchange-traded notes come with an annual expense rate, just like other investment instruments such mutual funds. The expense ratio is basically the annual fee that the investment manager charges to cover maintenance, administration and other costs.

Let's now look at the core benefits of an ETN.

The benefits of exchange-traded note

Investing in an ETN has three key benefits. These are the three core benefits of investing in an ETN.

Taxes can be reduced

Investors do not have to pay short-term capital gains tax if they don't receive any dividends or interest payments. The lump sum amount will be paid to the investor at maturity. This is a relatively low tax and only payable once.

Accurate performance tracking

An ETN does not own any of the underlying assets. It doesn't need to be rebalanced, as opposed to an exchange-traded funds. The ETN is a mirror of the asset class or index it tracks.

Certain markets are accessible

Because of the high minimum investment requirements and high commission rates, it can be difficult for small investors to access markets for certain instruments, such as commodity and currency futures. ETNs are accessible to all investors, regardless of their size.

Conclusion

To determine whether it's a good idea to invest in exchange traded notes, think about your financial goals and your risk appetite. Angel One, India's most renowned brokerage house, can provide professional guidance.