Commodities Charts Biography
The final common structure is the exchange-traded note. ETNs aren't ETFs, but investors typically consider them alongside ETFs—the blanket term is "exchange-traded products." There are many commodity-based ETNs, tracking everything from broad commodity indexes to individual agricultural products and metals.
ETNs are designed to deliver the total return on a broad index or individual commodity, but rather than being structured as pools of securities that the fund itself owns, they are instead unsecured bonds (notes) issued by a firm that agrees to deliver the return of the index it tracks. Because of this, ETN investors need to be aware of the specific terms of the note and the credit risk of the issuer.
If the company offering the ETN goes bankrupt, holders of the ETN become creditors of the firm. In fact, when Lehman Brothers went bankrupt in 2008, shareholders of the three Lehman ETNs were left with securities that had become worthless. Shareholders' only hope now is that they will recover some pennies on the dollar in bankruptcy court.
Be cautious with ETNs—while they have the advantage of potentially delivering exactly the return of the underlying index with no tracking error, we think the credit risk is not worth shouldering, since similar products are generally available in a non-ETN structure.
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