Investing in ETNs (exchange-traded notes)

Ever since reading Adventure Capitalist some years back, I’ve followed Jim Rogers and his investment advice off and on. Back in 1998, he created something called the Rogers International Commodity Index (RICI), which was the broadest commodity index available and attempted to represent both developing and developed countries’ consumption patterns.

The only problem was that it was hard for the average individual investor to actually invest in the RICI. This changed last year with the advent of Elements Exchange-Traded Notes. Their offerings of products include four that are related to the RICI, RJI (the Rogers International Commodity ETN), RJA (agriculture), RJN (energy), and RJZ (metals).

Having invested and written about investing in ETFs before, I wanted to look into what ETNs were all about. But because they’re relatively new, not nearly as much has been written about them. Seeking Alpha had a few good articles, and I’m still in the midst of reading RJI’s prospectus to try to understand what it is that I’d be getting into if I invested in it.

Here’s what I’ve been able to gather at a basic level. Underlying exchange-traded notes are senior unsecured debt securities rather than equities (which underly ETFs). In addition to carrying market and other risks common to ETFs, they also carry issuer risks in that if the issuer defaults or is unable to make payments on the note, you as an investor in an ETN are basically out of luck. (However, most issuers are presumably established and credit-worthy, so theoretically this risk is minimal, though certainly not zero.) ETNs also issue no distributions or interest payments and do not impart ownership of assets to holders.

Currently, they also carry a favorable tax treatment, but ETNs’ tax treatment has recently been under review by the IRS.

I’d be curious if anyone had any opinions about ETNs, the RICI or commodities in general. Plenty of recent financial articles have been written about whether the recent performance of commodities has been fueled by speculation or if their bullish performance is here to stay for the long-term (as Jim Rogers would probably argue). Thoughts, anyone?

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