You may already know about the advantages they have over conventional mutual funds … liquidity, low costs, transparency, diversification, and more.

What you may not know is that there is a new investment that looks a lot like an ETF but is actually a whole different species. I'm talking about ETNs: exchange traded notes.

On the surface, ETNs share many of the characteristics of ETFs. You can buy and sell them on the stock exchange throughout the day, their performance closely mirrors an index, and they give you access to specialized market niches like commodities and currencies.

However, there is One Gigantic Difference…An ETN Is Really a Bond!

That's why they're called "notes" rather than "funds." Yet it usually doesn't pay interest at a fixed rate, like say a Treasury bond would. Instead your "interest" is the return on a designated index.

Let's look at an example:

The iPath S&P GSCI Crude Oil ETN (OIL) is very popular right now. It's designed to track the return of a crude oil price index. This gives you a way to participate in the crude oil market without using more complicated and risky tools like futures.

When you buy the OIL ETN, are you actually buying oil? No, you're not. What you are buying is a promise from the issuer - British banking giant Barclays, the corporate parent of iPath - to pay you a return linked to the performance of the Goldman Sachs Crude Oil Return Index at some date in the future.

So with OIL you don't get any oil, directly or indirectly. All you get is a promise from Barclays Bank that you'll be repaid when the ETN matures, with no claim on any particular assets. You are now an unsecured creditor of Barclays.


Email of the day (1&2) - on additions to the Chart Library:

"Please add to the chart listings: iPath S&P 500 VIX Short-Term Futures ETN (NYSE ARCA)-symbol VXX Thanks. Happy holidays to everyone."

And

"Would you mind adding HTC Corp of Taiwan (2498.TW) to the chart library?"

Eoin Treacy's view Thank you for these suggestions which have now been added to the Chart Library.