ETNs carry the following two risks that ETFs don't:
Credit risk is the risk that the institution that has issued the ETNs will default on the notes. Remember, ETNs are issued as unsecured debt securities—meaning there are not specified assets that serve as collateral for the ETNs. Instead, ETNs are only backed by the full faith and credit of the issuer. In good times, this isn't typically a problem. But during a financial crisis when banks and other large financial institutions—the main issuers of ETNs—are at risk of collapsing, it can be a big problem.
To illustrate my point, the following is a list of ETN issuers:
- Bear Stearns
- Lehman Brothers
- Morgan Stanley
- UBS
- Barclays Bank
- Goldman Sachs
- Credit Suisse
- BNP Paribas
Any of these names look familiar? If you paid any attention to the news about the Credit Crisis of 2008, you definitely recognize these names. A few of them are not even around anymore.
Call risk is the risk that the issuer of the ETN may call the ETNs back before maturity. If an issuer calls an ETN back, the issuer will compensate you for the ETN according to the call provision in the ETN, but you will lose the right to hold the ETN until maturity.
