ETN (Exchange Traded Note)

Exchange Traded Note (ETN) is a debt security (derivatives) issued by an underwriting bank, whose value depends on the movements of a stock index or some other benchmark. They were created by Barclays in 2006 and have become an alternative to ETFs. Gold ETN is an instrument designed to track the price of gold and silver ETN is an instrument designed to track the price of silver.


ETNs are securities combining the aspects of bonds with aspects of ETFs (with minor differences). Their value is based on the performance of a market index or other benchmark, but contrary to ETFs, the funds don’t actually own anything. They are debt notes – a promise to pay an amount on the maturity day, depending on the performance of the index or other benchmark it’s been linked to. ETNs’ value is also influenced by the credit rating of the issuer – it may drop if its rating is downgraded. ETFs on the other hand are products representing a share in the underlying security. Generally, gold and silver ETNs are often useful for traders, but long-term investors should own physical metals, not notes.

History of ETNs

The first ETN, named iPath, was issued by Barclays Bank on June 12, 2006. It was soon followed by ETNs created by Bear Stearns and Goldman Sachs, and later by BNP Paribas, UBS, Lehman Brothers, Morgan Stanley, Credit Suisse and Deutsche Bank. Two years after the issuance of iPath there were 56 ETNs from nine issuers on the market.

ETN and Taxes

ETNs are treated as prepaid contracts. Any difference between purchase and sale price is treated as a capital gain. They don’t make any capital distributions, and they don’t pay interest or dividends. The tax payment can be deferred – it is paid when the investor decides to sell their investment. Long-term capital gains have a lower tax rate than short-term capital gains or interest. There’s no way one can avoid paying the tax, but control over its timing can be a huge benefit for many investors. Because ETNs do not have any inherent short term capital gains (unless liquidated early), they can be more favorable than ETFs (where gains come from short term capital changes such as the rolling over of underlying futures).

Tracking Error

ETNs don’t have any tracking error – their performance matches the performance of the underlying asset, index or commodity. ETFs, on the other hand, may not exactly match it and may be subject to some discrepancies. Although an ETN tracks some index, its return is not based on it. ETN is just a promise to pay its holder an amount replicating the underlying index.


ETNs can be bought or sold on stock exchanges during normal trading hours. They can also be redeemed directly to the issuing bank. The latter may be subject to additional charges. Redeeming more than 50,000 units, however, is possible only once a week.

Credit Risk

ETNs are debt instruments and therefore they are subject to the default risk of the underwriting bank in addition to the market risk of the underlying asset (unlike ETFs where the risk is only from the market).

Gold ETN

ETNs are available for a wide variety of underlying assets such as commodities, stocks, currencies and market indexes. Gold ETNs are a popular means of investing in / trading gold without the need to deal in futures or own physical gold. Similarly, silver ETNs are used to invest in / trade silver instead of using futures or physical silver. Gold ETNs are widely used because they come with no tracking error (as compared to ETFs) and are one of the most liquid ETNs in the market. Gold ETNs can be acquired either long or short and can be both: leveraged and unleveraged. It is usually the combination of leverage and ease of investment that appears most appealing to traders.

Deutsche Bank ETNs:

  • DGZ – 100% anti-gold, moves the opposite direction to gold. Purchase if you want to profit on gold’s decline (not recommended for most investors, as this means taking positions against the main trend).
  • DZZ, GLL – Like above, but these funds involve double leverage. In other words, if gold gains 1%, this fund loses 2%.
  • DGP – Pro-gold with double leverage. Moves in the same direction as gold, but involves double leverage. If gold gains 1%, the fund gains 2%.

Uses of ETNs

While Exchange Traded Notes are very useful for gold and silver traders, they are not our first choice when it comes to choosing vehicles for long-term investments. Please read more about paper gold and paper silver (related terms below) for details.