+ 7.05
+ 2.21%
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What's The Difference Between ETFs and ETNs?

January 24, 2017 1:36 pm
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If you follow the world of exchange-traded products, then the delisting of the VelocityShares 3X Inverse Crude ETN (OTC:DWTI), linked to the S&P GSCI Crude Oil Index Excess Return, and the VelocityShares 3X Long Crude ETN (OTC:UWTI), which linked to the S&P GSCI Crude Oil Index Excess Return, was a pretty significant event in 2016.

Those exchange traded notes (ETNs) had about $2 billion in combined assets under management before Credit Suisse, the issuing bank behind the products, relegated them to over-the-counter trading and ceased taking creation orders.

DWTI and UWTI are some of the largest exchange traded products to ever be liquidated or relegated to non-major exchange trading. That assets under management tally also shows how popular these products were with traders (both made frequent appearances in the StockTwits trending bar).

ETNs vs ETFs

While similar in name, exchange-traded funds and exchange-traded notes have some critical differences.

“ETNs are debt securities issued by financial institutions that promise to pay the return of an index, minus fees and taxes, according to ETF Trends. “Consequently, investors are exposed to the credit risk or the possibility the underwriting bank goes bankrupt. The note can be vulnerable if the issuer gets into financial trouble, otherwise known as a default.”

In other words, in an ETF returns are generated because the fund actually owns whatever stocks are in it. ETNs don’t own the actual stocks, and only promise to pay returns based on what would have happened had you actually owned them. With an ETN you assume the credit risk of the issuer, which puts you at risk if the issuer goes under.

ETNs are a common way to add leverage to a position, which makes them popular short-term trading vehicles. Part of what made DWTI and UWTI trendy was they provided leverage to the oil market – a favorite of many intraday traders.

Fortunately, there are other ways to get leverage in the oil market (if you’re really missing UWTI and DWTI).

Other Trading Options

For example, the Direxion Daily Energy 3X Bull Shares (NYSE:ERX) or the Direxion Daily Energy 3X Bear Shares (NYSE:ERY) both offer exposure to the oil market in the form of leveraged ETFs.

ERX attempts to deliver triple the daily returns of the S&P Energy Select Sector Index, which consists of stocks in the oil, gas, and energy equipment industries. ERY seeks to deliver triple the daily inverse returns of that index.

Top holdings in the index include Exxon Mobil Corporation (NYSE:XOM) (17.36 percent) Chevron Corporation (NYSE:CVX) (14.09 percent) and Schlumberger Limited (NYSE:SLB) (8.18 percent).

ERX and ERY are just one other option available if you want short-term exposure to the oil market. Other leveraged ETFs that can be used in lieu of DWTI and UWTI include the Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares (NYSE:GUSH), which attempts to deliver triple the daily returns of the S&P Oil & Gas Exploration & Production Select Industry Index, and the Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares (NYSE:DRIP), which aims to deliver triple the daily inverse returns of the benchmark.

There are other vehicles like this out there, just remember when trading products like the ones mentioned in this article that they make for short-term trades only. You should “have time to manage positions frequently to respond to changing market conditions and fund performance,” says Direxion. “Direxion shares are investment vehicles for active, sophisticated investors who are looking to gain magnified exposure to the markets.”

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