History of the ETN

Launched in 2010, ETNs are still relatively new products in the South African exchange listed market. They bring a new dimension to exchange traded products as well as offer their own unique characteristics to the South African investment world.

What is an ETN?

An ETN is a listed debt instrument where a contractual obligation is made by an issuer, to pay the holder a return which is linked to the performance of underlying securities or benchmarks. Examples of these include: the performance of one or more shares or bonds, an index, an exchange rate or a commodity.

ETNs are senior, non-bespoke, unsubordinated, uncollateralised debt securities. They are mostly issued by underwriting banks. Like other debt securities, ETNs have a maturity date and are backed only by the credit of the issuer. These have long dated maturity periods that generally range from 5 to 30 years.

ETNs can also act as an effective hedging tool and are like Exchange Traded Funds (ETF) in that they are listed on an exchange and can be bought and sold throughout the trading day. They provide investors exposure to markets which are otherwise difficult to gain access to in a cost-effective way

Benefits of investing in ETNs
  • Accurate in tracking underlying securities

ETNs provide investors with a product that tracks the performance of various underlying securities without any tracking error (deviation from the value of the underlying securities). The issuer guarantees the holder a return which is the same as that of the underlying securities, less expenses.

 

  • Simple

ETNs do not involve any of the difficulties or costs of buying and then managing several different securities or buying and storing physical assets.

 

  • Liquidity

Buying or selling ETN on the JSE can be done quickly and at a low cost, since issuers act as market makers by always offering clients a price at which to buy or sell ETN.

 

  • Guaranteed and transparentpricing

ETNs are priced using published settlement prices and this pricing is based on a transparent formula updated daily by the issuer.

 

  • Tax efficiency

ETNs may have some attractive tax consequences. While this could change in the future, ETN investors are usually responsible for paying taxes on their investment only when they sell it for a gain. ETNs don't distribute dividend or interest income the way a stock or bond fund may, so all taxes are deferred and taxed as capital gains.

Types of ETNs

Equity ETN

Commodity ETN

Interest Rate ETN

Currency ETN