The Financial Industry Regulatory Authority (FINRA) issued an investor alert about the risks involved with exchange-traded notes (ETNs) this week. ETNs are a type of debt security that trade on exchanges and promise a return linked to a market index or other benchmark.
According to FINRA, the difference between ETNs and exchange-traded funds is that ETNs don't buy or hold assets to replicate or approximate the performance of the underlying index. Some of the indexes and investment strategies used by ETNs can be quite sophisticated and may not have much performance history.
It warns that the return on an ETN generally depends on price changes if the ETN is sold prior to maturity (as with stocks or ETFs)—or on the payment of a distribution if the ETN is held to maturity.
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