Exchange Traded Notes (ETNs) and Exchange Traded Funds (ETFs) are popular investment instruments in Singapore. While ETNs were relatively recently introduced to the Singapore market, ETFs have existed for much longer. ETNs and ETFs allow investors to diversify their portfolios by investing in various assets such as stocks, commodities, and currencies.
However, investors must understand the significant differences between these two investment options before deciding which one to add to their investment portfolio. This article will discuss the differences between trading ETNs and ETFs in Singapore so you can make an informed decision when choosing between the two.
Structure
One of the main differences between trading ETNs and ETFs in Singapore is their structure. ETNs are unsecured debt securities issued by banks, whereas ETFs are investment funds that hold a basket of underlying assets. This difference in design has several implications for investors.
Since ETNs are debt securities, they carry credit risk. If the issuer of an ETN defaults, investors may lose their entire investment. In contrast, ETFs are not exposed to credit risk since they hold a diverse portfolio of assets.
ETNs also do not have an underlying index or basket of assets that track the performance of the market. Instead, their value is derived from the issuer’s financial health performance. Therefore, ETNs can be more volatile than ETFs, making them riskier investment options.
ETNs are structured as senior unsecured debt, meaning they have a higher priority of repayment in the event of bankruptcy than other forms of debt. On the other hand, ETFs do not have any preferential treatment in case of liquidation or bankruptcy.
Trading flexibility
Another significant difference between ETNs and ETFs lies in their trading flexibility. ETNs trade on an exchange like stocks, which means they can be bought and sold throughout the day at market prices. On the other hand, ETFs are priced at the end of each trading day based on the net asset value of their underlying assets. As a result, ETFs are only tradable at the end of the day when markets close.
ETNs also offer investors more trading flexibility regarding leverage and short selling. Due to their debt structure, ETNs can be leveraged to provide magnified returns to investors. Additionally, ETNs can be sold short, allowing investors to take advantageof market downturns.
However, ETNs also have a downside when it comes to trading flexibility. Due to their complexity, some ETN issuers may impose restrictions on trading, such as redemption fees or minimum holding periods. For example, Saxo Capital Markets PTE requires clients to hold their ETNs for at least 30 days before selling them.
Tax implications
Investors must also consider the tax implications of investing in ETNs and ETFs. In Singapore, ETFs are classified as collective investment schemes exempt from capital gains tax. Therefore, investors do not have to pay taxes on any gains from their investments in ETFs.
On the other hand, ETNs are subject to income tax, similar to bonds or stocks. Therefore, investors will be taxed on dividends or gains from holding an ETN. Additionally, if an investor sells an ETN at a profit, they will be taxed on the capital gains.
Traders who frequently buy and sell ETNs will also have to pay taxes on their trading income, which can significantly impact their overall returns. Therefore, investors must consider the tax implications before choosing between trading ETNs and ETFs.
Issuer risk
Another crucial difference between ETNs and ETFs is the issuer risk. As mentioned earlier, ETNs are issued by banks, which means investors are exposed to the issuer’s credit risk. Investors may lose their entire investment if the issuing bank becomes financially unstable or bankrupt.
On the other hand, ETFs do not have any issuer risk as they hold a diverse portfolio of underlying assets. Even if one company in the ETF’s portfolio faces financial difficulties, it will have a minimal impact on the fund’s overall value.
It is essential to research and understand the issuer of an ETN before investing to assess its creditworthiness and minimise potential risks. Traders must also closely monitor any changes in the issuing bank’s financial health and react accordingly.
Transparency
Transparency is another crucial factor to consider when comparing ETNs and ETFs. ETFs are required to disclose their holdings daily, allowing investors to make informed decisions about their investments. On the other hand, ETNs do not have this requirement and may not disclose their underlying assets or investment strategy.
ETFs are regulated by the Monetary Authority of Singapore (MAS), ensuring that they comply with all necessary regulations, such as disclosure requirements, asset diversification rules and investment limits. However, ETNs are subject to different levels of regulation, making them potentially riskier investment options.
Traders must consider the transparency of an investment before making any decisions to ensure they are fully aware of the potential risks and returns. It will help them make more informed investment decisions and avoid any surprises.
