What is the legal difference between ETFs, ETNs and ETCs

Question

I would like to understand how exchange traded funds (ETFs) can be classified in legal terms. According to Vanguard, there are five ETF structures

1. Open-End Funds
2. Unit Investments Trusts
3. Grantor Trusts
4. Exchange Traded Notes (ETNs)
5. Partnerships

The wording suggests that all 5 structures are considered ETFs. A document by SPDR also classifies the SPDR ETFs using structures 1-3, with most of their ETFs being Open-End Funds, a few of them Unit Investment Trusts, and only GLD being a Grantor Trust. Hence, exchange traded commodities (ETCs) seem to fall under structure 3, Grantor Trust. It is also interesting that the term ETC is more frequently used in the German speaking parts of Europe.

A nice summary that matches the definitions of Vanguard and SPDR can be found at etf.com. However, this document focuses mostly on tax related differences.

My questions are

• Is it correct to speak of ETFs, ETNs and ETCs as different entities in a legal document? My guess is no since "ETF" seems to be an umbrella term under which ETNs and ETCs are to be subsumed. An example: My impression is that the sentence "The fund invests in ETFs, ETNs and ETCs" would be sloppy as ETNs and ETCs are a kind of ETF.
• In which context (if at all) is it correct to use the term "ETC"? For instance: Is it equivalent to a Grantor Trust that holds commodities? Or is it also ok to use ETC for an ETN that replicates the price of a commodity?

I know that these are not really quantitative questions. Nonetheless, I assume quite a few people who work in portfolio and/or risk management have to cope with this legal mumbo-jumbo from time to time and may be willing to help. Also, this forum seems to be the best within the stackexchange universe for posting such questions.

Answer 1

I am not too knowledgeable with ETCs but here are some differences between ETFs & ETNs.

1. ETFs emerged from the concept of buying "baskets" of stocks (similar to mutual funds) & became popular because they were cheaper than mutual funds.

2. ETNs just as their name implies are Notes. They are similar to ETFs in the form of representing baskets of stocks but the exception is they are bought on "credit" and their returns might be affected by the credit rating of the issuers other than what they are meant to "track". I think many leveraged ETNs are formed with debt instruments

Answer 2

The umbrella term is Exchange Traded Product or ETP, so your sentence would become "The fund invests in ETPs".

For the second question a simple way of looking at it is, a ETN would have credit risk with the issuer, where an ETC would not.