However, not all exchange traded funds are created equal, investors still need to be weary of the cost of owning various funds, as many ETFs track the same indices while having varying expenses.
The ugly cousin of the exchange traded fund is the exchange traded note (ETN). Although they have similar names, they are created in nearly a completely different fashion. An ETN is an investment based on a promise; unlike ETFs they do not buy or hold the underlying assets to replicate the index for which they track. According to a recent FINRA press release on the risks of ETNs, they can be redeemed by the issuer at any time, which could be at a price less than what the investor purchased it for.
Another risk that needs to be considered, which FINRA points out, is the possibility the issuer of the exchange traded note defaults, which could have an obviously significant impact on the note’s price. Like all investments, there are some inherent risks that must be considered and weighed.
Asking these questions and examining the perils that we are exposed to comes with the territory of allocating capital. Some are more critical than others, but being aware of them is important.
Joseph “Big Joe” Clark, whose column is published Saturdays, is a certified financial planner. He can be reached at firstname.lastname@example.org or 640-1524.