Question #12
Reading: Reading 35 Exchange-Traded Funds - Mechanics and Applications
PDF File: Reading 35 Exchange-Traded Funds - Mechanics and Applications.pdf
Page: 4
Status: Unattempted
Correct Answer: B
Question
Exchange-traded notes (ETNs) are similar to exchange traded funds (ETFs), in that they both:
Answer Choices:
A. are subject to total default by the issuer
B. hold underlying securities
C. use the creation/redemption process
Explanation
Both ETFs and ETNs use the creation/redemption process. Some ETFs may lend securities
or use swaps, exposing the fund to some level of default risk. However ETNs are
unsecured, unsubordinated debt notes and thus an ETN's theoretical counterparty risk is
100% in the event of a default by the underwriting bank. Unlike ETFs, ETNs do not hold the
underlying securities.