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1.
An investor in exchange-traded notes can look forward to the kinds of regulatory protections that exchange-traded funds and open-end mutual funds enjoy.
False. ETNs are not governed under the same regulatory structure as those other investments.
2.
Exchange-traded notes are similar to traditional exchange-traded funds. Therefore, they are funds.
False. They are essentially bonds, not funds. They do not hold a fundful of securities.
3.
Investors can protect themselves from the credit risk of owning an exchange-traded note by using stop-loss orders.
False. Using a stop-loss order would address market risk, not credit risk. To address credit risk, investors should monitor the financial situation of the issuing bank.
4.
What is the main tax advantage of exchange-traded notes over exchange-traded funds?
Taxes are charged only on capital gains when the ETN is sold. ETNs are not tax-free, but they can be used to defer taxes as typically dividend or interest income is applied as an increase in the principal, so investors only have to pay taxes upon sale. At that time, the typically lower capital gains rate will be applied, not the ordinary income rate, and if the ETN was held for longer than a year, the lower long-term rate will be applied. The exception is with currency ETNs, which are taxed like other currency investments including ETFs.
5.
A big premium on an exchange-traded note is a good sign.
False. A big premium usually indicates that the market is uncomfortable about the health of the issuing company.
