What risks are exchange-traded notes most susceptible to?

Exchange-traded notes (ETNs) are particularly susceptible to credit and market risk due to their structure. ETNs are unsecured debt instruments issued by financial institutions, meaning that their value is tied to the creditworthiness of the issuer. If the issuing bank faces financial difficulties or default, the investor may suffer significant losses. This exposure to the credit risk of the issuer is a fundamental characteristic of ETNs.

In addition to credit risk, ETNs are also affected by market risk. They aim to track the performance of an underlying index or asset class, which means they can experience volatility and price changes based on market fluctuations. Any adverse movement in the underlying market can directly affect the value of the ETN, making it essential for investors to consider both the credit quality of the issuer and the potential market volatility associated with the asset they are invested in.

While there are other risks such as operational, systemic, liquidity, interest rate, currency, and geopolitical risks, these are less intrinsic to the nature of ETNs compared to credit and market risk, which are central to understanding the potential downsides of investing in these instruments.