Chapter 18: ODDS AND ENDS
Two investment vehicles which have not been discussed thus far:
1) Exchange-traded notes
2) Non-traded Real Estate Investment Trusts (Non-traded REITs)
Exchange-traded notes (ETNs) can be easily confused with exchange-traded funds (ETFs). ETNs appear to be very similar to ETFs. They are traded on an exchange just like an ETF; however, an ETN is simply a contract between the issuer and the purchaser. The return of the investment may be designed to track the stock or bond market as a whole, certain segments of the stock or bond markets, certain commodities or currencies. The purchaser typically accepts credit risk or counter-party risk from the issuer—a bank or brokerage firm, for instance.
The problem is that some ETNs do a very poor job of tracking their intended targets. The Wall Street Journal article found in Appendix B describes just how badly, and how quickly things can go South.
A Real Estate Investment Trust (REIT) is a company which owns or finances income-producing real estate or mortgages. Many REITs operate the properties that they own. REITs are required to distribute at least 90 percent of taxable income to shareholders.
REITs may be publicly-traded on an exchange like any other stock, or they may be publicly-registered but not traded on an exchange. Publicly-traded REITs are fine to consider.
The dividend income for REITs is higher than the dividend income of other stocks. Yields can be even higher for non-traded REITs versus publicly-traded REITs. Non-traded REITs have less transparency and less liquidity than publicly-traded REITs.
When an investment lacks transparency, you should be very careful. Commissions, as well as operating fees can be excessive and it may be difficult to evaluate the value of the REIT’s assets. Certain non-traded REITs have suffered huge declines in value as described in the Investment News article featured in Appendix C.
REITs, ETNs are often used in certain retirement accounts—the subject of the next chapter.
Have a question? Contact Ed Mahaffy.
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