Not surprisingly, ETNs aren’t for everybody. Cautious investors who don’t like the idea of assuming the credit risk and potential loss of their investment, no matter how remote the possibility might be, might want to avoid investing in ETNs.
Why would anyone want to consider adding an ETN to their portfolio? ETNs are gaining popularity mainly due to the advantages that they offer to investors. For starters, ETNs track the underlying product/index exactly, while ETFs simply try and replicate the performance of the underlying index.
ETFs also have to make yearly capital gains and required income payments to shareholders, which are taxable. ETNs do not have to make these distributions; as a result, investors can defer taxes until the ETN is sold or it matures.
In a nutshell, an ETF is like a stock and an ETN is like a bond. If you’re comfortable with the institution providing the ETN, you can take advantage of these many benefits not found in an ETF.
This article is brought to you courtesy of John Whitefoot from the Daily Gains Letter.