They've become wildly popular.
Their assets grew more than 30% a year during the past decade. For
saw their assets rise just 5-6% per year, according to McKinsey
And there are no signs of that growth slowing down. McKinsey &
Co. projects assets in these securities will more than double in
the next five years to at least $3.1 trillion, from a little more
than $1.5 trillion today.
I'm talking about exchange-traded products. Most of that growth is
in exchange-traded funds (ETFs), but a handful of overlooked
exchange-traded notes (ETNs), yielding up to 16%, also are included
And while there are ETFs for everything from copper to cocoa,
ETNsoffer a unique type of exposure to mainly two high-yield
groups: master-limited partnerships (MLPs) and business-development
For example, there is the
JPMorgan Alerian MLP
, which yields 5% and tracks the performance of a basket of 50
master limited partnerships. And the
UBS ETRACS 2x Wells Fargo
of 16% and tracks 26 BDCs.
ETNs are an entirely different beast from ETFs. Both track the
performance of an index and
a simple way to move in and out of a sector. Both may pay dividends
thrown off by the securities in the index they track. And both can
be bought or sold during the day, just like a stock.
But that's where their similarities end.
Unlike ETFs, ETNs do not represent a claim on
or commodities. The ETN
-- usually an
Morgan Stanley (
JPMorgan Chase (
-- may invest in the index companies to collect returns, but ETN
holders like you and me don't have a claim on those assets.
Instead, ETNs are promissory notes. They are senior unsecured debt
that promises to match the return of a specific
Like bonds, ETNs have a
. At maturity, generally 15 to 30 years from the issue date, the
ETN is redeemed. Unlike bonds, however, you don't receive the
in cash. Instead, the amount you receive is based on the
performance of the index. What you get at maturity depends on how
well the index has performed.
But one of the features that may be attractive to many investors is
that ETNs can help you avoid some potentially hairy tax issues.
As debt, ETNs distribute interest income that's taxable at your
. Although the income doesn't qualify for the reduced
tax rate, you do receive a simple 1099-DIV form for the income you
receive. That's especially helpful when investing in an ETN
tracking master limited partnerships, where investors are subject
to the more complex K-1s when investing in individual MLPs.
Also, you can hold these ETNs in a tax-sheltered
or 401(k) account without fear of throwing off more than $1,000 in
unrelated business taxable income (UBTI)
that can come from investing directly in master limited
Combine that with their high yields and you can see why
exchange-traded notes have become a favorite of income investors.
But are these the perfect income securities? They definitely
provide a goodoption to look into in your search for income, but
you should be aware that most ETNs trade very few shares a day. For
Morgan Stanley Cushing MLP High Income ETN (
trades fewer than 3,000 shares a day, meaning it can be difficult
to buy or sell large lots without moving the price.
Action to Take -->
Despite that, any income investor looking for a class of securities
"overlooked" by most investors would do well to spend some time
researching more about exchange-traded notes.
-- Carla Pasternak
P.S. -- If you haven't already seen it, don't miss
StreetAuthority's report -- "Top 5 Income Stocks for 2012." These
five select investments pay dividend yields of 7.5%... 8.8%... even
11.5%. For more details on these investments, you can visit this
Carla Pasternak does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.