Exchange-traded notes

Exchange-traded notes (ETNs) are senior, unsecured, unsubordinated debt securities typically issued at $50 per share by a bank or financial institution. ETNs track the performance of a particular market index but do not represent ownership in a pool of securities.

ETNs have a stated maturity date but pay no periodic coupon interest and offer no principal protection. ETN investors receive a cash payment linked to the performance of the underlying index (minus fees) when the note matures.

Credit rating

• ETNs are backed only by the credit of the issuer. In addition, the market price of an ETN partially depends on the performance of the underlying index or benchmark.

Taxability

• The tax treatment of ETNs is uncertain and is being reviewed by the IRS. Investors should consult a tax professional for additional information.

Leverage and inverse strategies

• Some ETNs may employ leverage and inverse strategies different from traditional ETNs.
  • Leveraged ETNs are often identified with a multiplier in their names, such as "2x" or "3x." These securities are designed to track double or triple the returns of a particular index over a stated period of time.
  • "Inverse" or "short" ETNs are designed to track the opposite performance of an index, or with a leveraged inverse ETN, a multiple of the opposite of the index over a stated time period.
• Because ETNs typically reset monthly, they generally provide returns only for the length of their reset period as defined in the prospectus. The performance of leveraged and inverse ETNs can differ significantly from the performance of the underlying benchmark over longer time periods. Investors should read the prospectus carefully prior to investing for a description of the underlying index, the calculation methodology used to determine returns, fees, and other details.

Liquidity

• Vanguard Brokerage Services® does not make a market in ETNs. If you want to sell your ETNs prior to maturity, Vanguard Brokerage can provide access to a secondary market. Though there generally is a secondary market that provides liquidity for ETNs, liquidity can vary depending on the trading momentum and the popularity of the ETN and the credit quality of the issuer.
• ETNs generally are listed on an exchange though the issuer is not required to maintain such a listing. While some ETN issuers may buy and sell their securities, they are not required to do so.

Fees

• Vanguard Brokerage does not participate in the new-issue market for ETNs. A commission will be charged for transactions in the secondary market.

Risks

• The principal repayment received by an ETN holder depends partially on the performance of the underlying index. If the value of the underlying index of an ETN decreases, or increases by an amount less than the applicable fees, the return of principal investors will receive at maturity will be less than the original investment.
• ETNs carry credit risk that the issuer will default or will be unable to make timely payments of principal. The repayment of principal and any additional return due the investor— either at maturity or upon repurchase by the issuer—depends on the issuer's ability to pay, regardless of the performance of the underlying index.
• The return on an ETN is linked to the performance of an underlying index. The value of the index may be impacted by market forces that affect the value of ETNs in unexpected ways.
• Certain events can impact an ETN issuer’s financial situation and ability to make timely payments to ETN holders, including economic, political, legal or regulatory changes and natural disasters. Event risk is unpredictable and can significantly impact ETN holders.
• ETNs sold prior to maturity may be subject to substantial gain or loss. The secondary market may also be limited.