Update : Oct. 29, 2012
ETNs (Exchange Traded Note) are listed products called "listed investment securities" or "indicator-tracking securities".
ETNs, like ETFs (Exchange Traded Fund), are products whose price tracks a stock price index, commodity price, or other such "specified indicator". As indicated by the word "Note", because the price is ensured to track the specified indicator based on the credibility of a financial institution (issuer), ETNs differ from ETFs in that there are no assets backing the security.
ETNs are the most active listed product behind ETFs in European and US stock markets (in Europe they are known as "Listed Certificates").
The following introduces some of the primary characteristics, points of note, and differences with ETFs for ETNs.
Because the tracking of the underlying indicator is guaranteed by a financial institution, such as a major securities firm or a bank which is the issuer, ETNs have no backing assets. In contrast, ETFs hold some kind of stock or linked note as a backing asset. For example, in the case of a TOPIX-linked ETF, the fund holds stocks of the approximately 1,700 TSE 1st Section issues as backing assets in order to track the underlying index.
Because the correlation between the underlying indicator and the ETN’s redemption value is ensured by the issuer financial institution, there are no tracking errors between the redemption value and the underlying indicator, excluding fees pertaining to management. In contrast, ETFs which hold backing assets may have tracking errors between the base price and the underlying indicator due to management results.
(*It is not guaranteed that trading can be conducted at the underlying indicator’s price when actually trading due to market demands.)
Because ETNs do not have backing assets, it is possible to even include indicators which have assets which are difficult to hold, such as stocks of emerging countries with foreign investment restrictions, scarce resources, or agricultural products which degrade over time.
Credit risk also must be considered for ETFs which include linked-notes, much like ETNs. For more details, please refer to the "ETF Risk" page.