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What’s the Difference Between ETFs and ETNs?

What follows is a transcript of the video above.

Let’s Try a Practice Question 

Which of these options is Debt Security?  

     A. ETF  

     B. ETN 

     C. Open End  

     D. Closed End 

The correct answer here would be B.  

What Are ETN’s? 

An ETN, or exchange traded note, is a short-term-one year. It provides a return of principle with a kicker based on the market performance and credit risk. You are subject to that paying ability of the broker-dealer who sold this. If you buy one of these from a broker-dealer, and they go bankrupt, what are you? A creditor, and you hold a note.  

What Is an ETF?  

Is an ETF, or exchange traded fund, a debt or equity-like security? It is more equity-like. You own a slice of a portfolio, all the shares in an index. Luckily there is no big credit risk in this situation. If you hold the S&P500 ETF of a company that files for bankruptcy, you still own a piece of that portfolio; these are actual shares that you own a tiny sliver of.   

How Do You Trade ETF’s?  

Shares of ETFs trade like stocks, A buyer must buy ETF’s after 4 pm EST. There is an aftermarket, but a buyer can also buy all day long. Can a buyer buy a share of a mutual funds all day? No, they need to wait. How long do I need to wait? A buyer can buy it on the exchange, buy at the offer, and sell at the bid. Whereas the NAV calculation is a forward pricing mechanism. Which is Closed-End more like? The Open End or the ETF? It is more like the ETF. And the Open End is a special type.

Dave's mission (and job: Managing Director of Course Design) is to make FINRA exam training engaging, approachable, and dare he even say, enjoyable. Having trained and coached over ten thousand students to exam success he knows how to present complex subjects in memorable and understandable ways. Prior to joining Knopman Marks in 2011, Dave practiced bankruptcy law at Weil, Gotshal & Manages and served as a law clerk in a the Southern District of New York Bankruptcy Court working on the General Motors and Lehman Brothers bankruptcies. Building on his legal expertise and training allows him to keep all our courses updated with the latest legislative and rule-making changes. Dave currently trains for the Securities Industry Essentials (SIE) exam and the Top-Off Series 6, 7, 24, 57, 63, 65, 66, 79, 86, 87, and 99 exams. He also delivers executive one-on-one training and shares his passion for learning outside of work as a ski instructor and yoga teacher. Dave graduated magna cum laude from Fordham Law School, and cum laude with a BA from the University of Pennsylvania.