SIE practice questionmediumETNs — Overview
An Exchange-Traded Note (ETN) differs from an ETF primarily because an ETN:
- AIs guaranteed by the FDIC
- BCan only be purchased by institutional investors
- CIs an unsecured debt obligation of the issuing bank, carrying credit risk of the issuer✓ Correct answer
- DHolds a diversified portfolio of stocks
Explanation
Why C — Is an unsecured debt obligation of the issuing bank, carrying credit risk of the issuer
ETNs are unsecured debt instruments issued by banks that promise to pay returns linked to a benchmark index. Unlike ETFs, ETNs hold NO underlying assets — they are essentially IOUs from the issuing bank. This means ETN investors face credit (default) risk of the issuer. If the bank fails, investors may lose their investment. ETNs typically have no tracking error since the bank promises the exact index return.
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