Update : Oct. 29, 2012
Linked Note-type ETFs are ETFs for which the fluctuation rate of net assets per unit is the same as the fluctuation rate of an underlying index by investing in bonds (linked notes) primarily issued by financial institutions for the purpose of producing investment results which track such underlying index. The redemption price of the linked note which the ETF uses as an underlying investment is guaranteed by the linked note issuer to track the movements of an indicator, and by holding the linked note, the fluctuation rate of the ETF’s net assets per unit tracks that of the indicator.
While disparity (tracking errors) between the fluctuation rates of the net assets per unit and the underlying indicator does not occur for linked note-type ETFs, there is credit risk associated with the issuer of the linked note.
Though many linked note-type ETFs invest in linked notes which have a high convertibility close to their maturity date, the base value of the ETF may decline due the linked note’s price dropping or being nullified as a result of bankruptcy or deterioration of financial situation on the part of the linked note’s issuer.
When investing in linked note-type ETFs, it is important to confirm the health of the linked note’s issuer financial institution (for example, financial conditions, credit rating, etc.) and appropriately understand the credit status of such issuer.
As of December 2011, there are 3 linked note-type ETFs listed on TSE. The underlying issues and their credit ratings are disclosed in the securities registration statement of the ETFs and monthly reports. Investors should remain conscious of this information when investing.