What is an ETN and how to invest

ETN stands for Exchange-Traded Note, or a note traded on the stock exchange. It is a type of financial instrument similar to ETFs (Exchange-Traded Funds), but with some differences, even compared to ETCs.

On the market since 2006, introduced first in the USA and, subsequently, in the Old Continent as new investment instruments, ETNs allow investors to replicate the performance of benchmark indices of various nature (equities, bonds, currencies, cryptocurrencies, etc.).

Over the years, they have become quite popular especially in some sectors, such as digital currencies. After the approval of ETFs on spot Bitcoin in 2024, the cryptocurrency market is becoming increasingly institutionalized. According to some forecasts, ETNs on Bitcoin and Ethereum will continue to attract investors, especially in Europe, where they are already more widespread than ETFs.

For 2025, analysts see the most promising ETNs as those linked to cryptocurrencies and expanding sectors such as renewable energy and AI. However, the credit risk of the issuer must always be assessed before investing.

The ETN characteristics are clarified in detail below: what it is and what to pay attention to before investing.

What are ETNs and what are they used for

Exchange Traded Notes or ETNs are the close “relatives” of ETFs and ETCs, they can be considered real structured bonds issued by banks or SIMs, they do not produce certain interests and give the investor the right to replicate the performance of individual securities, or of a group of values in a sector of economic activity, or relating to the entire stock exchange list.

In simpler terms:

ETNs do not directly own the underlying assets, but are debt securities issued by a bank or a financial institution. Their value depends on the performance of a benchmark index, such as cryptocurrencies or stocks. They have a higher credit risk than ETFs, because the payment depends on the issuer.

This last concept means that, in the event that the issuing bank goes bankrupt, there is a real and potential possibility that the investor will suffer the effects of the bankruptcy of the banking institution.

ETNs allow you to invest in assets that are difficult to replicate with traditional ETFs, such as commodities, currencies or alternative strategies. They offer investors the possibility of gaining exposure to a specific market or asset class without having to directly purchase the underlying asset.

The difference between ETNs, ETFs and ETCs

Investors who intend to approach financial instruments other than traditional ones must know that there are substantial differences between ETNs, ETFs and ETCs.

An ETF is a fund that faithfully replicates the performance and therefore the yield of stock, bond or commodity indices. Its structure allows the capital to be separate from the issuer, so there is no credit risk. Furthermore, it invests in multiple assets at the same time and is therefore suitable for those who want to diversify.

An ETN, as already specified, is a debt security and not a fund. Issued by a bank or financial institution, its yield is linked to a specific index. In essence, the ETN replicates the underlying asset exactly and unlike ETFs on stocks, ETNs do not distribute dividends, because they are debt instruments.

Finally, the ETC is a financial instrument that replicates the price of a raw material (gold, oil, silver, natural gas, etc.). There are two types: ETC with physical coverage, with which the product is guaranteed by the holding of the raw material (e.g. ETC on physical gold); synthetic ETCs, based on derivative contracts and subject to the credit risk of the issuer.

In summary, here are the differences between ETFs, ETNs, ETCs:

• ETF: is a fund with capital separate from the issuer and therefore without credit risks that invests in multiple assets, reducing the specific risk;
• ETN: is a debt security with high credit risk, if the issuer goes bankrupt, the investor may lose the capital;
• ETC: is a commodity certificate with credit risk if in synthetic form. Ideal for investing in raw materials without directly owning the asset

ETNs and ETCs are the most similar to each other. The main difference is to be found in the nature of the underlying asset: when this is represented by raw materials (soft or hard) we refer to Exchange Traded Commodities, while in cases where the underlying asset is an index we refer to ETNs.

However, both ETCs and ETNs share the same characteristics of the transaction structure, both being structured bonds without maturity issued by a special purpose vehicle against the investment in the underlying asset.

How ETNs work: the main characteristics

The functioning of ETNs is quite simple.

A bank or other financial institution issues an ETN as a debt security. Its commitment consists in paying investors a return based on the performance of a specific underlying asset or index.

ETNs are traded on the stock exchange like stocks and ETFs, with a price that varies during the day. Unlike ETFs, however, they have a maturity date (usually long-term, e.g. 20-30 years). At maturity, the issuer repays the value of the ETN, which reflects the performance of the underlying index.

ETNs do not distribute dividends or interest because they do not directly own the underlying assets.

Let’s imagine a ETN linked to the price of Bitcoin:

If the price of Bitcoin rises by 10%, the value of the ETN will also rise by about 10%. If it falls by 10%, the ETN will lose about 10%. Unlike an ETF, the ETN does not actually buy Bitcoin, but simply promises to pay you the performance of the crypto.

ETN, how to invest?

The subscription procedure for ETNs allows specialized intermediaries operating on the primary market to perform arbitrage.

On the secondary market, the price of ETNs is aligned with the market value of the asset (different types of indices) and this allows investors to directly access the underlying market, thanks to the direct investment by the issuing bank.

Costs and commissions applied to ETNs

Subscribing to an ETN allows each investor to access indices that are difficult to invest in at a low cost: in fact, as with Exchange Traded Commodities, there is no application of any “entry”, “exit” and “performance” commission charged to the investor.

The only commissions that are applied to ETNs are those of intermediation and trading provided by the bank or SIM and are variable in relation to the time of holding the security.

Are ETNs safe?

Considering that ETNs are unsecured debt of the issuer, their safety depends on a few factors.

If it is issued by a bank with a high credit rating; if it is well regulated and listed on reputable exchanges; if it has sufficient trading volume to ensure liquidity, this instrument is probably safer.

Beware of these risks, though. If the bank or institution that issued the ETN goes bankrupt, you could lose all of your invested capital. The credit rating of the issuer is therefore a requirement to check (solid banks such as JP Morgan or UBS are more reliable than smaller issuers).

Some ETNs have a low trading volume, so you may have difficulty selling them quickly without losing value. Finally, since the value of an ETN follows an asset or an index, it is subject to volatility. If the underlying asset loses value, the ETN will also follow the same fate.

Original article published on Money.it Italy. Original title: Cos’è un ETN e come investire