An ETN looks like an ETF and trades on an exchange all day.

But it does not own any assets. It is an unsecured promise from a bank.

The bank pledges to pay a return tied to an index, and nothing more.

ETNs are used to track hard-to-hold things, like volatility or commodities.

They pay whatever the index does, minus fees, if the bank stays solvent.

History warns what can go wrong. In 2008, Lehman's notes became near-worthless when it failed.

Some volatility ETNs have collapsed or been shut down after sharp moves.

The structure remains, popular for niche bets most funds cannot make.

When you buy an ETN, your money goes to the bank, not into a pile of assets.

The bank promises to pay the index return when you sell or at maturity.

There is no basket of stocks or bonds backing it, only the bank's word.

The bank hedges its own promise however it likes, behind the scenes.

You get exact index tracking, with no cash drag from holding real assets.

But you also take on the bank's credit risk, whether you meant to or not.

The first stress point is the issuer. If the bank fails, the note can go to near zero.

That is the risk Lehman's note holders learned in 2008.

The second is closure. A bank can stop issuing new notes, which distorts the price.

The third is the index. Some ETNs track volatile things that can gap violently.

The note then follows that index down, fast.

For access to niche markets, an ETN can track cleanly and cheaply, which is a real use.

From a strong bank, the credit risk is small in normal times, and that deserves a fair hearing.

What can break is the bank behind it, or a violent move in the thing it tracks.

You can read the terms. Every ETN names its issuer, its index, and its risks in the prospectus.

The issuer's credit rating is the safety gauge most buyers ignore.

An ETN is a bank IOU dressed as a fund, with the bank's health as its load-bearing part.

It can track niche markets well, but it carries credit risk a real ETF does not.

The next test is stress at a major issuer. Watch the credit standing of the bank behind your note.