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ETFs 112: What to Know about Exchange-Traded Notes

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1.
A sizable premium or discount on an exchange-traded note could be a red flag. Why?
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Either of the above. Either of these situations could lead to big premiums or discounts on an exchange-traded note.
2.
Distributions from exchange-traded notes are taxed at _______.
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Ordinary income rates. Distributions, though rare, are taxed at ordinary income rates.
3.
A large premium on an existing exchange-traded note might do what if new shares of the note are issued?
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Fall. Large premiums can quickly collapse upon the issuance of new shares of an exchange-traded note.
4.
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.
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False. ETNs are not governed under the same regulatory structure as those other investments.
5.
Exchange-traded notes (ETNs) and exchange-traded funds (ETFs) have a lot in common. Which one of the following statements is false?
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ETNs and ETFs both hold a basket of securities in order to track the performance of an index. ETNs and ETFs both trade on exchanges; that's what the 'E' in their name stands for. They both have a create and redeem process for their shares, which allows authorized participants to exchange shares for the net asset value of the underlying index, preventing large trading spreads from opening up. They both charge a fee based on a percentage of the assets under management. However, only ETFs are funds which actually hold securities in trust for the shareholders; ETNs are the debt of the issuer, who promises to pay the return of the underlying index instead of a set interest rate.