ETFs, ETNs, and Index Products

ETFs trade intraday on an exchange at market-determined prices; open-end mutual funds are bought/redeemed from the fund at the next computed NAV (forward pricing).

A large block of ETF shares (typically 25,000–200,000) created or redeemed only by Authorized Participants, usually via in-kind exchange of the underlying basket.

A large broker-dealer under contract with the ETF sponsor that delivers or receives the securities basket to create or redeem creation units.

AP arbitrage through creation/redemption pushes ETF prices toward NAV; closed-end funds have no such mechanism, so they can trade at large premiums or discounts.

In-kind transfers mean the fund rarely sells securities for cash to meet redemptions, so there are few forced capital gains distributions.

The difference between the ETF's return and the return of its benchmark index.

Expense ratio, cash drag from dividends, sampling/optimization, rebalancing and index reconstitution costs, and illiquid underlying securities.

Tracking error is a return phenomenon (fund vs. index); premium/discount is a price phenomenon (market price vs. NAV), worst during volatility, halts, or closed foreign markets.

An unsecured senior debt obligation of an issuing bank promising an index-linked return; it holds no basket of securities.

Credit/issuer default risk (primary), call or early-redemption risk, and potential large premiums since there is no true arbitrage basket.

Market, limit, and stop orders; buying on margin; and short selling — plus you pay commissions/spreads instead of sales loads.