I've just read the article in the link below and would like to know if someone can elaborate on a statement. I have added the whole paragraph, but highlighted the part about the use of ETNs as cheap funding. How does banks use ETNs as funding?

I live in Denmark where the only ETF-like offerings are ETNs and I'm trying to figure out why none of the banks are creating ETFs.

The investment banks take advantage of their superior sophistication. From the get-go, the ETN is a fantastic deal for banks. It's in the DNA of the product; once held, an ETN almost can't help but be fabulously profitable to its issuer. Why? They're dirt-cheap to run because the fixed costs are already borne by infrastructure set up for structured products desks. They're an extremely cheap source of funding, the life blood of the modern bank. More important, this funding becomes more valuable the bleaker an investment bank's health. As a cherry on top, investors pay hefty fees for the privilege of offering this benefit. This isn't enough for some issuers. They've inserted egregious features in the terms of many ETNs. The worst we've identified so far is a fee calculation that secretly shifts even more risk to the investor, earning banks fatter margins when their ETNs suddenly drop in value.

The article is from Morningstar: Exchange-Traded notes are worse than you think

  • $\begingroup$ The NASDAQ OMX Nordic exchange ( available in Denmark) has plenty of ETFs. nasdaqomxnordic.com/etp $\endgroup$
    – pyCthon
    Apr 3, 2015 at 16:11
  • $\begingroup$ Thanks for the comment. Yes I've seen the page but I'm looking for an ETF offering with Danish stocks. I was a bit unclear. especially Sweden has a lot of ETFs. $\endgroup$
    – KERO
    Apr 3, 2015 at 16:24

1 Answer 1


ETNs are senior, unsecured and unsubordinated debt securities issued by an underwriter. When you buy an ETN you are essentially lending money to the issuer in exchange for exposure to an index minus some basis points(management fees). As with most debt instruments, if the issuer defaults, you already assumed the credit risk.

As for the question of why ETNs are a source of cheap funding (I'm skeptical on the life blood part), take into consideration that the largest ETN (AMJ) currently has 5.6 Billion in AUM and charges 0.85%. Some ETNs also accrue the expense ratio on a daily basis, UBS is known to do that.

Consider the following example: UBS currently has 37 ETNs with a total AUM of 5.76 Billion. Assuming an average fee of 1.00% AUM, accrued on a daily basis, that would provide UBS with roughly $200k per trading day assuming a 252 day trading calendar.

  • $\begingroup$ But how does that make an ETN an "extremely cheap source of funding"? They would have to have some sort of exposure to the underlying index and then it's not cheap (because then it is speculation), or am I missing something? I understand your answer, but it's not my interpretation that your answer is the point of the statement in the article. I'm still rather confused as to why ETNs are the preferred instrument. $\endgroup$
    – KERO
    May 21, 2015 at 17:54
  • $\begingroup$ @KERO Operational costs are cheap, its not hard to automate an index. Also most ETNs charge their % aum fees on a daily basis/level. To clarify further ETNs are not the preferred instrument, look at the volume on some US ETFs vs US ETNs with the same index for example, the only ETNs in the US with decent volume are the ones with a difficult to physically trade index. $\endgroup$
    – pyCthon
    May 21, 2015 at 23:21
  • $\begingroup$ @KERO My guess is in Denmark there are certain legal restrictions or disincentives to ETFs. $\endgroup$
    – pyCthon
    May 22, 2015 at 1:46

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