If an ETN allows you to access a market you otherwise couldn’t access on your own, then owning an ETN makes sense. Many ETNs focus on commodities and currencies, and many investors don’t want to open a futures trading account to access these markets. They might already have, however, an equity brokerage account, so they can buy a currency position or a commodity position directly via an ETN.
For many, that’s a better way to access a market than having to deal with opening another account, margins, approvals, etc.
ETNs are not ’40 Act funds. Because of that, they can go around what you might call “structural limits” of ’40 Act products. One of those limits is concentration. The regulation imposes restrictions on fund concentration in an effort to ensure a basic level of diversification in these funds—think of it as an investor protection measure.
As an investor, if you want a really concentrated portfolio, ETNs might be the way to go because they can be highly concentrated on single positions.
“Taking on counterparty risk is not something people would do lightly, and in the equity space, you don’t see a lot of ETNs, because there’s not much an ETN can do for you there that other structures can’t,” said Elisabeth Kashner, director of ETF research at FactSet. “They are popular in the MLP space where there are complicated tax rules. Outside of that, the biggest place is in commodities to avoid K-1 and mark-to-market.”
“In the end, everyone is facing a trade-off,” she added. “Most investors want to find the sweet spot between the risk and the reward. ETNs might offer benefits, but they also have risks.”
Contact Cinthia Murphy at [email protected]