An exchange-traded note, or ETN, is a debt security that bases its returns on the performance of a market index.ETNs combine aspects of exchange-traded funds (ETF) and bonds. Both track an underlying asset and both trade on a major exchange, like a stock. But investing into an ETF means investing into the assets it tracks. If you buy an ETF that tracks the S&P 500, that ETF will buy the 500 stocks that comprise the S&P 500. ETNs, which are typically issued by a financial institution, work more like a bond. Bethany the investor decides she wants to buy an ETN. She contacts Barclays Bank PLC, which was the first financial institution to issue ETNs, and she invests in an ETN that’s based on the S&P 500. Barclays will pay Bethany the return of the S&P over a certain period of time, minus expenses, and return Bethany’s principal when the ETN matures. ETNs provide no coupon payments or principal protection. But investors should realize that ETNs carry risk. It’s up to the issuer to determine how it will deliver returns to Bethany that match the returns of the S&P, and in some instances, the issuer will rely on derivatives and other non-traditional investments to reach its goal. If the issuer goes bankrupt, the investor could lose her money. If the issuer’s credit rating is downgraded, the ETN’s value can drop. ETNs defer all taxes as capital gains, which are lower than ordinary tax rates, and their holders don’t need to pay taxes until they sell the investment. And since an ETN pays at maturity based on the index’s price, there’s little risk of tracking errors occurring.