An important distinction for ETF investors.
It's easy to understand the widespread appeal of ETFs, as exchange-traded products can offer lower fees and flexibility to trade throughout the market day. Some folks may not notice, though, that some are actually ETNs -- that is, exchange-traded notes instead of exchange-traded funds. It's a subtle but important distinction. ETFs represent a direct stake in an underlying asset, but ETNs are "unsecured" -- meaning they don't own anything but a promise to follow a given strategy. Think of them as more of a contract like a bond than a direct equity stake like a share of Apple (ticker: AAPL). And though they have no principal protection, ETNs are much more flexible and allow for very sophisticated strategies. Here are nine to consider.
MicroSectors FANG+ Index 3X Leveraged ETN (FNGU)
Microsectors is a unique investment shop trying to disrupt the exchange-traded product universe by offering focused and tactical offerings rather than the typical index fund. A great example of that is FNGU, an investment benchmarked to 10 of the most dynamic tech stocks including Facebook (FB) and Netflix (NFLX) that tries to deliver three times the daily return of those holdings. That multiplier effect is what is implied by the word "leverage" in the name of this product. This is an ETN because it is a structured product using sophisticated instruments to generate that extra momentum. It's also a great example of the kind of strategies investors can unlock outside the typical ETF.
iPath EUR/USD Exchange Rate ETN (EROTF)
One of the most common areas where you'll see ETNs instead of ETFs is currency investing. That's because foreign exchange markets don't deal with stocks, and in truth most currency investors don't actually own physical currency because of the complexities. Instead, someone looking to play differences in exchange rates tends to be involved in related derivatives contracts including futures and options. Currency funds deploy the assets along with leverage just like the aforementioned FNGU product. After all, when you're trying to shave fractions of a penny here or there in exchange rates, you have to use a multiplier effect if you want it to add up substantially.
iPath S&P 500 VIX Short-Term Futures ETN (VXX)
As the name implies, this iPath product provides exposure to the Cboe Volatility Index -- known as the VIX. This benchmark was designed as a proxy for market expectations of forward-looking volatility. Based on S&P 500 index options across the next month, the VXX is even more complex in that it tracks short-term futures that track this VIX index. Because that effectively makes this product a derivative of a derivative, it can't play by the same rule as a traditional ETF holding blue chip stocks. However, the VXX is an intriguing tool for investors interested in playing volatility instead of playing a company's fundamentals.
VelocityShares 1X Daily Inverse VSTOXX Futures ETN (EXIV)
While ETNs like VXX can help you profit from increased volatility, they also are flexible enough to help you do the exact opposite. That's what you get in EXIV, one of the best-performing investments of 2019 that is a bet against volatility in Europe. The fund is complicated, benchmarked to the Euro Stoxx 50 Volatility Index that is similar to the Cboe's VIX index using put and call options. However, it is also designed as an inverse fund, meaning it has a goal of profiting from a decline in short-term volatility instead of a rise. Needless to say this strategy is incredibly difficult to pull off as an individual investor, however, you can simply buy this ETN that deploys the approach for you.
iPath Dow Jones-UBS Commodity Index Total Return ETN (DJP)
This iPath commodity fund is another example of how ETNs open up different asset classes and strategies through their use of derivatives. DJP looks to track a bunch of commodities like gold, crude oil and grains but avoids the expense and logistical hangups of physical goods by holding futures contracts instead. As a result, investors who want to easily play hard assets can get a one-stop investment that is diversified across a host of commodities -- without shouldering the complexity of grain silos, gold vaults or other features necessary to hold physical goods.
United States Oil Fund (USO)
If you don't want a diversified basket of commodities, USO offers a direct play on crude oil via "near month" crude oil futures contracts for West Texas Intermediate light, sweet crude oil traded on the New York Mercantile Exchange. Oil is one of the most traded raw materials on the planet and the United States Oil Fund is equally popular as a result. The exchange-traded product boasts net assets of more than $1.4 billion across speculators, investors looking to hedge and other market participants.
iPath MSCI India ETN (INPTF)
You might think a country-based product should simply be an ETF like the many of the international funds you're already familiar with. But the tax advantages and cost-savings of an ETN structure make these kind of products well-suited for emerging markets that aren't as easy for U.S. investors to access. That's exactly what this India ETN offers. It's benchmarked to an MSCI index of India investments in a similar way as other regional funds, but with a streamlined structure for the end user. Even a professional tax preparer could have trouble deciphering the tax rate on foreign dividends or other complicating factors, so an ETN like this India product helps simplify things.
JP Morgan Alerian MLP Index Exchange Traded Notes (AMJ)
It's not just emerging markets that can create accounting messes. Anyone who has owned individual shares of MLPs, or master limited partnerships, knows first-hand the complications of this unique kind of publicly traded company. You are a partner instead of a shareholder, getting direct profit-sharing distributions instead of the typical dividends and receiving arcane K-1 tax forms. A big benefit of being an exchange-traded note is that you can streamline paperwork and complexity, and AMJ does this without sacrificing dividend potential. As of its September distribution, its equivalent yield was calculated at about 8%. No wonder investors find this structure appealing, forking over some $2.8 billion in assets to this ETN.
Barclays ETN+ Shiller CAPE Index ETNs (CAPE)
A fairly sophisticated metric that has garnered more attention in the last few years, CAPE is an abbreviation for the cyclically adjusted price-to-earnings ratio. In a nutshell, this data point is a measure of whether a stock is fairly valued against long-term profit trends. Investors who may be familiar with price-to-earnings measures generally should think of CAPE as a similar valuation measure but with a much longer time frame, taking the average of 10 years of earnings and then adjusting those profits for inflation. The complex measure is the work of renowned economist Robert Shiller -- and now, thanks to this Barclays exchange-traded note, investors can apply this screening metric to the stock market with a single holding and without crunching numbers on their own.
Popular ETFs that aren't ETFs:
-- MicroSectors FANG+ Index 3X Leveraged ETN (FNGU)
-- iPath EUR/USD Exchange Rate ETN (EROTF)
-- iPath S&P 500 VIX Short-Term Futures ETN (VXX)
-- VelocityShares 1X Daily Inverse VSTOXX Futures ETN (EXIV)
-- iPath Dow Jones-UBS Commodity Index Total Return ETN (DJP)
-- United States Oil Fund (USO)
-- iPath MSCI India ETN (INPTF)
-- JPMorgan Alerian MLP Index Exchange Traded Notes (AMJ)
-- Barclays ETN+ Shiller CAPE Index ETNs (CAPE)
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