A couple months ago, I wrote a post about the iPATH MSCI India Index exchange traded security (symbol: INP) that tracks an India stock market index. I indicated that this was the first India stock market Exchange Traded Fund ("ETF"). However, I have since discovered that INP is an Exchange Traded Note ("ETN"), not an ETF.
The ETN is a derivative (perhaps similar to futures) that is designed to track the MSCI India Total Return Index. ETFs typically hold shares of stock of the underlying constituents of the various indices that they are designed to follow. An ETN, on the other hand, is an issued security that the issuer promises will track the index. Accordingly, because no shares of the underlying index securities are held within the ETN, the owner of an ETN puts his or her faith in the issuer to maintain the appropriate value to track the designated index. Accordingly, the credit-worthiness of the issuer is a concern for anyone purchasing an ETN.
The Motley Fool published a gloom-and-doom article about this a few months ago. As usual, the Motley Fool's article was very superficial and did not really explain how the ETN's value is derived. I will admit that I am no expert on ETN, but I have to believe that Barclay's (the issuer of INP) hedges its risk through a combination of futures and/or options tied to the benchmark MSCI India Total Return Index.