Canadian Securities Course (CSC) Level 2 Practice Exam

What is a common feature of exchange traded notes?

1. Annual fee for management services

2. Performance guaranteed by the bank

3. Investment in underlying assets

4. Daily market trading restrictions

The correct answer is: Investment in underlying assets

The correct answer pertains to the nature of exchange-traded notes (ETNs). ETNs are structured as unsecured, unsubordinated debt securities issued by financial institutions and are designed to track the performance of a particular index or benchmark. Unlike traditional equity or mutual funds, ETNs do not hold the underlying assets representative of the index they track. Instead, they derive their return from the performance of the index, which differentiates them from other investment products that directly involve investment in underlying assets. Choosing this option highlights the integral characteristic of ETNs, emphasizing that while they track indices, they do not possess the actual assets themselves, which is a pivotal aspect of understanding how ETNs function in investment portfolios.