ETFs & Funds · Intermediate · 4 min

Equity, bond and commodity ETPs (ETF, ETC, ETN)

You can tell ETFs, ETCs and ETNs apart and explain why some exchange-traded products carry the credit risk of their issuer.

One letter, big difference

On a trading screen, a gold product, a bond fund and a volatility tracker all look the same: a ticker, a price, a buy button. Their names differ by a single letter: ETF, ETC, ETN.

That letter tells you what you actually own. In one case, assets that belong to you and are kept separate. In another, a promise from a bank to pay you something. This lesson explains the difference, and why it matters most when something goes wrong.

Fund vs. debt

An exchange-traded product, or ETP, is the umbrella term for anything that trades on an exchange and tracks an index, a commodity or another asset. The main types:

ETF: an exchange-traded fund. Its assets are held separately by a depositary and belong to the fund's investors, as described in the first lessons of this rubric. Equity and bond ETFs are usually UCITS funds in the EU.
Exchange-traded commodity (ETC): a debt security issued by a company, which tracks a commodity such as gold or oil. Many precious metal ETCs are backed by physical metal held in a vault. Others use futures or swaps, with collateral.
Exchange-traded note (ETN): a debt security issued by a bank or other institution, promising to pay the return of an index. The SEC explains that ETNs do not own a portfolio of assets, which makes holders dependent on the issuer's creditworthiness.

Why do ETCs exist at all? EU UCITS funds must spread their risk across issuers, so a fund holding only gold would not qualify. A single commodity is therefore packed into a debt security instead.

The key question for any ETP: if the issuer fails, what is left? For an ETF, the assets in the fund. For a backed ETC, the collateral, such as the metal. For an unsecured ETN, a claim against an insolvent company, possibly worth little.

Index flat, ETN −20%

A fictional ETN tracks an index that ends the year unchanged. During the year, the issuing bank reports large losses, and its credit rating is cut.

Investors start to doubt whether the bank can pay.
The ETN falls 20%, even though the index did not move.
If the bank failed completely, the holders would become creditors in its insolvency.

An ETF on the same index would not have been affected by the bank's troubles, because its assets are not the bank's.

Common mistakes

Calling every ETP an ETF. The legal structure decides your risk.
Ignoring the issuer of an ETC or ETN. Its strength matters as much as the index.
Assuming all gold products hold gold. Some use futures or swaps instead.
Skipping the prospectus. It states exactly what backs the product.

The takeaway

All ETPs trade on an exchange, but only ETFs are funds. ETCs and ETNs are debt securities, so the issuer's strength and collateral matter.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the product whose value depends most directly on the issuer's ability to pay.

Tap the chart.

The SEC explains that ETNs are unsecured debt and hold no portfolio. If the issuer fails, holders can lose their investment.
2Why are single commodities like gold often offered in Europe as ETCs rather than ETFs?

A UCITS fund must spread its risk. A product tracking only gold is therefore structured as a debt security instead.
3An ETN's index is unchanged, but its price falls. What could be the reason?

SEC filings for ETNs warn that a downgrade of the issuer can lower the note's value, even if the index has not moved.
4What does ETP stand for?

ETP covers all exchange-traded products. Their legal structures differ a lot.

of 4 correct.