Exchange-Traded Products: What’s the difference between an ETF, ETN, & ETC?

Karl 23rd Nov 2023 No Comments

Reading Time: 4 minutes

Investing can feel like deciphering a secret code at times, especially with terms like ETFs, ETNs, and ETCs floating around.

In this article we’re going to explore the differences between Exchange-Traded Funds (ETFs), Exchange-Traded Notes (ETNs), and Exchange-Traded Commodities (ETCs).

Get your head around these different types of Exchange-Traded Products and you’ll almost certainly improve your chances of making informed investing decisions.

So without further ado, keep on reading for all the info or click on a link below to jump straight to a specific section.

- ETFs, ETNs, & ETC’s explained
- What’s the best Exchange-Traded Product to invest in?

What is the difference between ETFs, ETNs, & ETCs?

Even if you’ve just a passive interest in investing, it’s likely you’ve already come across the ETF, ETN, & ETC acronyms.

So what do they stand for? And… more importantly, what do they mean?

Let’s start with ETFs, and how they work…

Exchange-Traded Funds (ETFs)

Think of an exchange-traded fund (ETF) as a basket which can hold a mix of assets in it, such as stocks or bonds.

When you buy an ETF, its value will mimic the performance of an index or asset class of your choosing.

For example, if you want exposure to a large number of firms operating in emerging markets then you may wish to buy an Emerging Markets ETF. That way you can avoid the faff and expense of buying tonnes of individual shares.

The same would also apply to an ETF tracking a major stock market index, such as the FTSE 100. Rather than buying shares in all 100 FTSE 100 firms, a FTSE 100 ETF would be an easier, and probably cheaper, way to go about it.

ETFs can offer a great, low-cost way of gaining exposure to a number of assets within a single investment. We say ‘low-cost’ because buying an ETFs is typically far cheaper than purchasing lots of individual shares, and in many cases, gets rid of the need to employ an individual to actively manage your portfolio.

As an added boon, ETFs can also be held within an ISA, making it easy to invest in them tax-free. This may not apply when buying shares, especially if buying multiples of fractional shares.

ETFs are flexible too in the way that you can easily buy and sell them on a stock exchange.

It’s worth knowing that there are a huge number of ETFs available. Popular ETFs include the HSBC FTSE 100 UCITS ETF, the iShares Core S&P 500 ETF, and Vanguard’s FTSE Emerging Markets ETF.

Exchange-Traded Notes (ETNs)

Created by Barclays Bank in 2006, Exchange-Traded Notes (ETNs) are credit notes issued by financial institutions.

So if you buy an ETN you can think of it like buying an IOU agreement, which promises to pay you back the return of a specific index or asset class.

If you buy an ETN, you don’t have to wait until it matures to cash in – you can sell it whenever you like for its current market value, similar to the ways bonds work.

The main reason why ETN’s became a ‘thing’ was to make it easier to retail investors to invest in hard-to-access assets. Yet before considering one, it’s worth knowing that they’re a fairly risky type of investment. You see, ETN’s are typically ‘unsecured’. That’s because, when you buy an ETN you don’t own any underlying assets. This means that if your borrower fails to repay what it owes you’ll likely lose out.

Exchange-Traded Commodities (ETCs)

Exchange-Traded Commodities (ETC’s), like ETFs, are bought and sold on stock exchanges.

If you’re keen to add commodities to your portfolio then buying an ETC could be a decent way to go about it. That’s because ETC’s typically focus on physical commodities, such as gold or silver.

Say you buy a Gold ETC – your investment will track the price of gold. So when the gold price rises, the value of your ETC will also rise. And, obviously, when the gold price falls, your ETC will also slump in value.

ETCs can be a solid way of gaining exposure to commodities without all the faff dealing with the actual goods. If we take gold for example, there are numerous things you’d have to take into account if you wanted to own physical bullion – insurance and storage coats for starters. Buying a Gold ETC can side-step this issue.

It’s worth knowing that some ETCs will hold physical assets, while others use contracts to track prices. Regardless of this, ETC’s can be a straightforward way to add exposure to commodities in your portfolio.

Some popular ETCs right now include the Invesco Physical Gold ETC, the Invesco Physical Silver P-ETC, and the WisdomTree WTI Crude Oil ETC.

As you might expect, the main risk of buying an ETC is that your chosen commodity may fall in value. Yet this applies to all types of investing, of course.

What’s the best Exchange-Traded Product to invest in?

It’s the million dollar question, and we certainly don’t have a straight answer. Yet, regardless of the type of Exchange-Traded Product you may be interested in, it’s important to understand the differences between them.

For example, when it comes to managing risk, then it could be said that ETF’s can offer lower risk given that they’re able to offer more diversified portfolios than ETCs. This is because ETCs can can only track commodities whereas ETFs are far more flexible.

It’s also worth knowing that ETN’s are certainty on the riskier scale, due to the fact that they carry credit risk. This means you could lose out if a firm falls into financial difficulty and fails to repay its debt.

In terms of liquidity, ETFs are generally the easiest type of Exchange-Traded Product to sell. This arguably makes them more attractive for investors who need quick access to their wealth.

In short, the right Exchange-Traded Product for you, may not be the best ETP as the next person. That’s why, if you’re interested in buying an ETF, ETC, or ETN it’s important to do your research, and to properly weigh up the pros and cons.

You may find that following a well defined investment strategy, and understanding your tolerance for risk and overall investing goals, will make things that much easier.

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Disclaimer: When investing your capital is at risk. Remember, the value of any investment can both rise and fall. Always do your own research.

MoneyMagpie is not a licensed financial advisor. Information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.