May 18, 2012
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Home > Investments > Exchange Traded Notes
Exchange Traded Notes or ETNs
Exchange Traded Notes (ETNs) are similar to ETFs. While ETNs share some attributes with Index Funds and Equities they differ in structure. Both have low market entry barriers and allow you to track index based commodity prices on the JSE. However, ETNs are debt instruments and not equity instruments, therefore they do not own the underlying commodities. Instead, an ETN is an unsecured senior debt note issued by a bank or financial institution. The underwriting institution has an obligation to pay the holder of the JSE listed ETN security a return linked to the performance of the underlying asset, security or benchmark.
Despite ETNs being debt instruments they do not offer capital protection. Exchange Traded Notes are non-interest paying debt obligations that fluctuate with the price of the commodity it tracks and redemption is based on the underlying commodity price. Exchange Traded Notes do not fall under the regulation of the FSB because they are not considered Collective Investment Schemes. However, they are regulated by the JSE and because ETNs are debt instruments they are subject to the solvency and credit rating of the issuer.
Probably one of the most important reasons for the popularity of ETNs is the taxation. Exchange Traded Notes are treated as prepaid agreements and therefore capital gains tax is paid on maturity or when the security is sold.
