WSJ editor Karen Damato recently took another look at ETNs after last year’s credit crisis highlighted the risks of investing with exchange traded notes.
The key difference between investing in ETFs and ETNs is whether you want to own a portfolio or own a promise. However, although ETNs expose investors to credit risk, they do offer tax efficiency and exposure to hard-to-access assets that aren’t always available through ETFs.
One example – the iPath Dow Jones-UBS Commodity Index Total Return (DJP) is an ETN that is linked to an index composed of the prices of 19 exchange traded futures contracts on physical commodities.
ETNs also provide a way to bet on stock market volatility. The iPath S&P 500 VIX Short-Term Futures ETN (VXX) is linked to an index that reflects the implied volatility of the S&P 500 Index at various points along the volatility forward curve.
Another ETN that provides long-short exposure to trends in commodity prices is the Elements S&P Commodity Trends Indicator – Total Return (LSC).