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WASHINGTON—The Financial Industry Regulatory Authority (FINRA) issued a new Investor Alert called Exchange-Traded Notes—Avoid Unpleasant Surprises to inform investors of the features and risks of exchange-traded notes (ETNs).
ETNs are a type of debt security that trade on exchanges and promise a return linked to a market index or other benchmark. However, unlike ETFs, ETNs do not buy or hold assets to replicate or approximate the performance of the underlying index. Some of the indexes and investment strategies used by ETNs can be quite sophisticated and may not have much performance history. The return on an ETN generally depends on price changes if the ETN is sold prior to maturity (as with stocks or ETFs)—or on the payment, if any, of a distribution if the ETN is held to maturity (as with some other structured products).
As FINRA's Investor Alert explains, an ETN's closing indicative value is computed by the issuer and is distinct from an ETN's market price, which is the price at which an ETN trades in the secondary market. Investors should understand that an ETN's market price can deviate, sometimes significantly, from its indicative value. If the ETN is trading at a significant premium to its closing or intraday indicative value, investors might want to consider similar products that are not trading at a premium.
"ETNs are complex products and can carry a raft of risks. Investors considering ETNs should only invest if they are confident the ETN can help them meet their investment objectives and they fully understand and are comfortable with the risks," said Gerri Walsh, FINRA's Vice President for Investor Education.
Exchange-Traded Notes describes the specific risks associates with ETNs, including:
FINRA's new Investor Alert also contains a step-by-step checklist to help investors determine if an ETN is right for them.
FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, informing and educating the investing public, providing trade reporting and other industry utilities, and administering the largest dispute resolution forum for investors and firms. For more information, please visit www.finra.org.