By Sean Hyman

There’s another product emerging in the Forex world that acts like the ETF’s cousins. It’s called an ETN – exchange traded note.

Honestly, ETNs are worth mentioning simply because they are a long-term currency strategy so your broker or money manager may recommend them in the future. But I personally don’t recommend ETNs at this time because they are very thinly traded. This means ETNs have wider spreads (which translates into larger trading costs), and it takes longer to enter and exit a position.

These could also have more slippage. Slippage is the difference in price from where you wanted to sell to where your broker actually sold your position at.

In a couple of years, ETNs may be worth really expanding into, but for now…they just aren’t viable instruments for most because the liquidity just isn’t there.

However, just so you can know the whole story: Currency ETNs are non-interest paying debt instruments which have prices that fluctuate with an underlying currency exchange rate.

Unlike ETFs, ETNs are debt obligations (like corporate bonds), so they are subject to the issuer’s solvency. In other words, you purchase them from a broker, and if the broker goes insolvent, you could lose your initial investment.

Nowadays, you actually do need to worry about credit risks and banks going insolvent. So in my opinion, you should avoid any vehicle that relies on the solvency of the issuer.  That’s another reason why I don’t find these appealing at this time.

So if there is an ETF and ETN for the same currency…take the ETF for now.