• This article explains what ETNs are, how they differ from ETFs, and why their maturity matters.
• The information is intended for asset managers looking to build comprehensive strategies using exchange-traded notes.
• FlexFunds offers an asset securitization program to enhance the liquidity and structuring of traded vehicles like ETNs. For more information, don’t hesitate to contact our experts.

When including an ETN in an investment strategy, asset managers must take into account variables specific to this investment vehicle, such as its maturity.

What is an ETN, and how does it differ from an ETF or a structured note?

An exchange-traded note (ETN) is a senior debt instrument issued by a financial institution (usually a bank) and designed to replicate the performance of a specific underlying index or asset.

Unlike traditional ETFs, ETNs do not directly hold the assets of the index; instead, they promise to pay managers the full return of the underlying asset (minus fees) at maturity.

If the issuing bank goes bankrupt, ETN holders assume that issuer’s credit risk, unlike an ETF, where the assets remain separate and protected.

Compared to other listed structured instruments, ETNs are exchange-listed structured notes with high standardization and liquidity. ETNs offer daily value transparency and ease of trading during market hours.

Key characteristics: Issuer, tracking, and maturity

The issuer of an ETN is usually a solid investment bank. This issuer acts as the counterparty and backs the fulfillment of the payment promise. However, since the ETN is debt of the issuer, its value is subject to the issuer’s solvency.

Another fundamental characteristic is tracking, or index replication. The ETN is usually strictly linked to the performance of the underlying asset through swaps or other derivatives, achieving virtually zero tracking error.

Finally, all ETNs have a fixed maturity term, unlike a perpetual ETF. This maturity defines the maximum horizon for the asset manager: at the end of the term, the issuer must redeem the note and pay its value as agreed.

What does the maturity of an ETN mean?

In finance, maturity is the date on which a debt instrument reaches its end and the issuer must return the principal to the noteholder.

For an ETN, maturity marks the moment of final settlement. The issuer calculates the accumulated return of the underlying asset and pays the noteholder the equivalent amount in cash.

Technically, the institutional manager who holds the ETN until maturity will receive the index value at closing, minus the fees stipulated in the prospectus. Since there are no interim coupon payments, all the return is concentrated in that final payment.

Maturity is usually specified in the prospectus. It can be within a few years (such as 5 or 10 years) or even decades, depending on the design.

In some cases, the issuer may include an early redemption option on certain dates (for example, after 5 years) or allow the asset manager to request redemption for minimum volumes, although this usually requires high minimum volumes and conditions that make it more accessible to institutional participants.

What happens at the end of the term?

When an ETN reaches its maturity date, it is settled. The institutional manager receives a cash payment from the issuer equal to the note’s “redemption value.”

This redemption value is calculated according to the agreed formula: it is generally the initial invested value adjusted for the change in the underlying index since issuance, after deducting any accrued fees.

What is the typical maturity term for an ETN in the market?

An ETN can have different maturity terms, but there are some standard durations:

Standard durations (5, 10, 30 years) and their rationale

In practice, ETNs tend to have maturities similar to bond terms. It’s most common to find ETNs with long-term maturities, typically between 10 and 30 years.

For example, many ETNs from global banks have maturities of 10, 20, or even 30 years, providing an extended horizon for tracking the underlying index.

Shorter-horizon ETNs also exist (for example, 5 years) for high-turnover indices or temporary strategies.

The rationale behind these terms is multifaceted. First, issuers and managers of institutional products tend to consider broad horizons; a long maturity allows the bank to plan index hedging (with long-term swaps) and keep the debt on its balance sheet.

Second, some underlying assets (strategic commodities, fixed-income strategies, etc.) are managed with a long-term view, so a longer-dated ETN aligns with the exposure sought.

Likewise, long maturities generate an implied rate curve that can be favorable for the issuer’s cost structure.

Factors that influence the choice of term

To choose the term, ETN issuers rely on different factors:

• Nature of the underlying asset: More volatile or short-cycle indices tend to be associated with shorter-maturity ETNs, while structural exposures favor longer terms.
• Liquidity and market demand: The most common maturities tend to attract greater interest and volume from institutional investors.
• Macroeconomic context: The rate curve and monetary policy affect the cost of financing ETNs at different terms.
• Issuer’s risk profile: The issuer’s solvency and balance sheet strategy determine the duration it is willing to offer.
• Investor’s horizon: Long-term investors, such as pension funds, prefer extended maturities; tactical strategies prioritize short or renewable terms.

How does maturity affect your investment strategy?

Maturity has a significant impact on the manager’s strategy.

From a liquidity standpoint, an ETN with a distant maturity can trade continuously on the exchange, but some niche instruments may have low volume and wide spreads.

Near maturity, activity tends to concentrate on closing or rollover positions.

The institutional manager must plan whether to hold the ETN until the end or liquidate it earlier; unlike an ETF, redemptions with the issuer usually require very large blocks (for example, 25,000 units) and formal procedures, which is why most investors sell on the secondary market.

In terms of return, since it doesn’t pay coupons, the ETN generates its entire gain in the final payment. This total return is comparatively tax-efficient, since the manager is only taxed when the note matures or is sold.

Finally, there’s the rollover factor. As an ETN approaches maturity, the manager who wants to maintain the exposure must decide how to reallocate capital.

Unlike funds with no maturity, an ETN doesn’t automatically “roll over”; the position must be sold or allowed to settle, and then another vehicle (another ETN, a similar ETF, etc.) must be acquired to continue the strategy.

To learn more about FlexFunds’ products that help improve ETN distribution, don’t hesitate to contact our executives. We will be glad to assist you!

Sources:

• https://www.rankia.cl/blog/fondos-mutuos-agf/6455317-etn-caracteristicas
• https://hexn.io/es/blog/qu-son-las-notas-cotizadas-etn-igz026mbaneqc0mmncd352tp
• https://www.fondoscotizados.com/%C2%BFque-es-un-etn/
• https://www.finra.org/investors/insights/exchange-traded-notes-avoid-unpleasant-surprises
• https://www.sec.gov/Archives/edgar/data/897878/000095010310003611/crt_dp20210.pdf
• https://www.motilaloswal.com/learning-centre/2023/10/a-comprehensive-guide-to-exchange-traded-notes
• https://www.etf.com/sections/etf-basics/etn-vs-etf-whats-difference