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What’s the Difference Between Exchange-Traded Notes and Exchange-Traded Funds?
By JLP | June 12, 2006
I don’t know if you noticed or not, but there is a new exchange-traded security out called Exchange-Traded Notes (ETNs). iPathETN, the exchange-traded notes arm of Barclays recently launched two ETNs based on commodities. ETNs differ from Exchange-Traded Funds (ETFs) in that they (ETNs) are debt instruments and ETFs are not.
The two Exchange-Traded Notes offered by iPath are:
The iPath GSCI Total Return Index ETN (Ticker: GSP Expenses .75% plus trading costs) – based on the Goldman Sachs Commodities Index, which has the following allocation:
For more information, check out the Info Sheet (pdf)
The iPath Dow Jones-AIG Commodity Index Total Return ETN (Ticker: DJP Expenses .75% plus trading costs) – based on the Dow Jones-AIG Commodity Index, which has the following allocation:
The interesting thing about these ETNs is their correlation with the S&P 500 Index. Correlation tells us how a particular security moves in relation to another security. The higher the correlation number, the closer the two move together. The smaller the correlation number, the less they move together. So, a lower correlation means that adding a particular security to a portfolio can help with diversification by giving the portfolio some downside protection because when one security is down, the other should be up (in theory). According to the information sheets, the GSCI has a 0.00 (1.00 is the highest) correlation with the S&P 500 Index while the DJ-AIG CI has a 0.09 correlation with the S&P 500 Index. So, they do seem to offer some diversification benefits.
The downside is that commodities have increased substantially over the last couple of years. Upside potential might be limited. Also, since commodities have a near perfect appear to have a LOW correlation with stocks, they could end up dragging down returns when stocks perform well. So, adding these ETNs to your portfolio is far from a no-brainer.
Thoughts?
Topics: Investing | 6 Comments »
June 13th, 2006 at 12:38 pm
Commodities have a near perfect correlation with stocks? Really? This site (http://www.investopedia.com/articles/trading/05/021605.asp) seems to suggest -0.2. Hardly perfect!
June 22nd, 2006 at 6:58 pm
Why would anyone want to buy the iPath ETNs?? There ARE commodity ETFs that already exist (oil, gold), and I believe Lyxor (or some other fund company) has a European-listed ETF that tracks Goldman’s Commodity Index or CRB or whatever.
This iPath product is full of questionable and undesirable attributes. Firstly, taxation is unclear – will these qualify as capital gains?. Secondly, the ETNs introduce issuer risk (ie. if Barclays goes bankrupt investors would be unsecured creditors and could get pennies on the dollar). OTOH, ETFs are protected by the Investment Company Act of 1940, which requires segregation of fund assets from those of the managing company, hence if the managing company goes bankrupt, the underlying fund assets are protected as are thus the interest of fundholders. And lastly, who the heck would want to pay the management fee of 75bps for this fund?!…seems very expensive compared to most ETFs.
Methinks Barclays is getting very greedy and wants to hose unsuspecting retail investors.
August 7th, 2006 at 5:21 pm
I believe the main tax advantage is that there will be no taxable events until you sell the security, or you wait until it matures–that’s if the IRS accepts this. Barclay’s lawyers seem to think so. Although ETFs do have some taxable events, they are few, and so, this probably isn’t much of an advantage.
However, commodity ETFs have more tax events than other ETFs because the contracts have to be continually rolled over into longer term contracts, and so there could be capital gains.
And, of course, this is good publicity for Barclay’s.
November 3rd, 2007 at 8:40 am
Please email me the tickers for rhe new Barclays iPath ETNs that have Currencies in them or others like Precious Metals. Thank You. Phone 916-224-1350
November 30th, 2007 at 11:25 am
Merrill Lynch now also offers exchange traded notes, see http://www.elementsetn.com for their prospectus.
March 5th, 2008 at 5:55 am
If you are looking for a list of all ETNs, you can find it at http://www.ETNCenter.com