Exchange Traded Notes are in a way a combination of bonds and Exchange Traded Funds. They were first issued by Barclays Bank PLC. Generally, notes are type of secured bonds with fixed returns and with principle protection but Exchange Traded Notes are unsecured debts, the returns of these notes depend on how good or how bad the markets perform and there is no protection of investor’s principle how one would have in case of bonds. ETNs can also be stock like bought and sold on the exchange during the trading hours, this feature of ETN matches with that of ETF.

One feature that helps the traders to differentiate between ETN and ETF is that there is a maturity associated with ETNs, so one can trade the ETNs on the exchange or wait for the maturity and get the principle and the gains or losses on that particular day. One aspect that may affect the price of these notes is the credit rating of the issuer of the notes. Therefore, even though there is not much change in the price of index, the value of exchange traded notes may fall due to the drop in the credit rating of the issuer. As per the IRS’ tax guide lines normal tax rates will be applicable on gains from currency ETNs as opposed to ETFs where capital gain taxes are applied. So when ETNs are compared to ETFs from taxation perspective ETNs loses its edge.

There are different types of Exchange Traded Notes available in the market today. However, the four major types of ETNs are Currency ETNs, Commodity ETNs, strategy ETNs and Emerging Market ETNs. Most of you might be aware about three of the above four types but Strategy ETNs. So what are strategy ETNs? Strategy Exchange Traded Notes are associated with the performance of the index. So Index Long and Index Short are examples of strategy ETNs.  Two of the popular ETNs offered by Barclays are iPath CBOE S&P 500 Buy Write Index ETN (BWV) and Barclays GEMS IndexTM ETN (JEM).

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With the introduction of Index ETFs the prime reason why traders are more attracted towards these investment instruments is because of the stock like flexibility it provides. Due to its popularity this type of funds not only adds new traders but it also encourages current index mutual fund investors to switch. Since ETFs can be traded on stock exchange during the market hours, investment managers can take index position to capitalize on the situation or limit their risk in bad times.

Some of the most popular Index ETF are:

1.)   iShares Russell Midcap Index (IWR): Investments of these funds are more focused on the mid cap stocks listed on Russell. Top holdings are TJX Companies, Avon Products, Precision Castparts Corp., Marsh & McLennan Companies, H.J. Heinz Company etc.

2.)   iShares Dow Jones Select Dividend Index (DVY): This fund is a perfect match for the investors that like to invest in dividend paying stocks. Top holdings of these funds are Lorillard Inc., Centurytel Inc., Eastman Chemical Company, VF Corporation Entergy Corporation etc.

3.)   iShares S&P 500 Index (IVV): Fund Managers here are focused on investing in good scripts listed on S&P 500. Top Holdings of these funds are ExxonMobile Corporation, Microsoft Corporation, GE, J.P. Morgan Chase, Procter &Gamble Company etc.

May it be Institutional Investors or active hedge fund managers, they all have one thing in common which is they all love Index ETFs. For these investment managers when it comes to increasing their exposure to the broad index or hedge their current positions they go for Index ETF purely because of its convenience.

Make 6% Per Month in ETFs. Trade only 10 minutes per evening. Click here to learn more.

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