Abstract
Exchange traded notes (ETNs) have existed since 2006 yet they have received scant attention in the academic literature. ETNs have several advantages over exchange traded funds (ETFs) such as minimal tracking error and favorable tax treatment. On the negative side, ETN investors bear credit risk, which was severe during the Great Recession. Since ETNs and ETFs are often structured based on the same indexes and are not always easily distinguishable from one another by investors, a comparison of the two types of securities is important. This study provides institutional and technical details related to ETNs that investors should understand better. The study also investigates the most significant risk affecting ETNs, credit risk, using regression analysis. The regression results show that credit risk matters as higher credit spreads decrease the number of ETNs outstanding. As a practical matter for investors, events like the Lehman bankruptcy in September 2008 will impact the demand for ETNs, which will remain volatile and subject to economic conditions.