Which of the following statements best describes exchange-traded notes (ETNs)?

• A. ETNs are mutual funds that pool investors' money to purchase a diversified portfolio of stocks and bonds.
• B. ETNs are government-issued bonds that pay a fixed interest rate until maturity.
• C. ETNs are unsecured debt securities issued by financial institutions that track the performance of a market index, but do not provide ownership in the underlying assets.
• D. ETNs are equity securities that represent partial ownership in a company and pay dividends to investors.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of Exchange-Traded Notes (ETNs). ETNs are financial instruments that are unsecured debt securities issued by financial institutions. They are designed to track the performance of a specific market index or benchmark.
2. Step 2: Clarify the distinction between ETNs and other financial instruments. Unlike mutual funds, ETNs do not pool investors' money to purchase a portfolio of assets. They also differ from government-issued bonds, as ETNs are not backed by the government and do not pay fixed interest rates.
3. Step 3: Highlight the key feature of ETNs. ETNs do not provide ownership in the underlying assets of the index they track. Instead, they offer returns based on the performance of the index, minus fees.
4. Step 4: Compare ETNs to equity securities. Equity securities represent ownership in a company and typically pay dividends to investors, which is not the case for ETNs.
5. Step 5: Conclude that the correct description of ETNs is: 'ETNs are unsecured debt securities issued by financial institutions that track the performance of a market index, but do not provide ownership in the underlying assets.'