Structure of ETNs
The returns of ETNs are linked to the performance of a market benchmark or strategy, less investor fees.
As discussed previously, ETNs are debt notes. When held to maturity, the investor will receive a cash payment that is linked to the performance of the corresponding index during the period beginning on the trade date and ending at maturity, less investor fees. Typically, ETNs do not offer principal protection.
ETNs could also be liquidated before their maturity by trading them on the exchange or by redeeming a large block of securities directly to the issuing bank. The redemption is typically on a weekly basis and a redemption charge may apply, subjected to the procedures described in the relevant prospectus.
The investor fee is calculated cumulatively based on the yearly fee and the performance of the underlying index and increases each day based on the level of the index or currency exchange rate on that day. Because the investor fee reduces the amount of return at maturity or upon redemption, if the value of the underlying decreases or does not increase significantly, the investor may receive less than the principal amount of investment at maturity or upon redemption.
Since ETNs are unsecured, unsubordinated debts, their risk is not rated by any of the ratings agencies. Instead, ETNs are backed by the credit of underwriting banks. Like other debt securities, ETNs do not have voting rights. Unlike other debt securities, interest is not paid during the term of most ETNs.
Read more about this topic: Exchange-traded Note
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