Whether you’re experienced at trading or a novice, you’ll need to look at various investment alternatives. Many investors may be tempted to stick with traditional stocks and bonds, while others may choose more esoteric instruments such as ETNs (Exchange-Traded Notes) or ETFs (Exchange-Traded Funds).
Ultimately, whether you decide to trade ETNs or ETFs will depend on your trading strategy and risk tolerance. Either way, you must do your research to make well-informed decisions about your investments and maximise your returns.
To help you decide, let’s look at the critical differences between ETNs and ETFs.
What are ETNs?
Exchange-Traded Notes (ETNs) are debt instruments traded on a stock exchange. They are not secured by collateral and only rely on the issuer’s credit. The credit risk is born by the investor, not the issuer. Banks and other financial institutions issue the notes, and their value is based on the performance of an underlying asset, index, or commodity. Traders use ETNs to speculate on the future price movements of the underlying asset.
Advantages of ETNs
There are numerous advantages to trading with ETNs. Let’s look at the top two.
Exposure
One of the main advantages of ETNs is that they offer investors exposure to an asset or index that investing in might be otherwise difficult or expensive. For example, gold ETNs expose investors to the gold market without physically owning any gold.
Cost
Another advantage of ETNs is that they are often less expensive than ETFs, and this is because there are no management fees associated with them.
Risks of ETNs
However, some risks are associated with ETNs, the main one being credit risk.
Credit risk
One of these is that they are issued by financial institutions, which means credit risk is involved. It also means that if the issuer of an ETN goes bankrupt, investors could lose all of their investment.
What are ETFs?
Exchange-Traded Funds (ETFs) are investment vehicles which enable traders to invest in a variety of financial markets and instruments. These funds are highly liquid and easy to buy and sell, so they are perfect if you need fast access to many assets.
Most ETFs track the performance of an underlying index, making them an effective way to gain exposure to an entire sector or asset class. Additionally, many ETFs are actively managed by a portfolio manager, providing traders with the opportunity to benefit from professional expertise and guidance.
Overall, ETFs offer investors a simple and efficient way to diversify their portfolios and achieve their financial goals.
Advantages of ETFs
ETFs come with many advantages, and we’ve highlighted just a few.
Liquidity
ETFs are more liquid than mutual funds. Unlike mutual funds, ETFs can be sold during market hours rather than just at the end of the day.
Passive management
ETFs, like mutual funds, have passive management and thus reduce management fees compared to actively managed equities. Passive management implies fewer capital gain distributions as well.
Ownership
Another advantage of ETFs is that actual physical assets back them. If the issuer of an ETF goes bankrupt, investors will still have ownership of the underlying assets.
Portfolio diversification
Depending on the kind of EFT you have, ETFs may provide some diversification to your portfolio. For example, if your ETF follows the Standard & Poor 500 market index, you have exposure to all market sectors and industries. However, if your ETF comprises gold mining stocks and tracks a gold index, you won’t have as much diversification because the industry sector is narrow.
Expense ratios
ETFs usually have smaller expense ratios than mutual funds, although this isn’t always the case. The annual percentage charge is the amount investors pay to cover fund management costs, shown as a percentage of the ETF’s value. ETFs provide low trading fees and a low cost of investment when compared with stock and mutual funds. Some stock brokerages no longer charge a commission for ETF trades.
However, there are certain disadvantages to using ETFs. One of these is that they often have higher expense ratios than ETNs, and this is because there are management fees associated with them.
So, which is the better choice for you?
Ultimately, investing in ETNs or ETFs depends on your circumstances and investment goals. If you seek to be exposed to a particular asset or index, then ETNs may be a good choice. However, if you are looking for diversification and lower costs, ETFs may be better.