Exchange-traded notes, or ETNs, the lesser known cousin of exchange-traded funds, gained favor during the boom in energy, metals, agriculture and the like. Favorable treatment of capital-gains taxes for ETNs, which we explained in a recent story, held particular appeal to commodities investors. That advantage has been sorely diminished by the credit crisis.

Buying an ETN is like buying a bond-ETF hybrid. It's an investment in an unsecured IOU from a bank, which agrees to pay a return based on the performance of a particular index. What "backs" an ETN then is a bank's ability to make good on it. In contrast, buying an ETF is an investment in the underlying assets of an index, which carries market risk but no credit risk.

Just weeks ago, the idea that major global banks could outright fail and render their ETNs worthless didn't strike nerves the way it does now. Although Bear Stearns imploded, it succeeded in fire-selling itself to J.P. Morgan (JPM) and its ETN, the BearLinx Alerian MLP Select Index (BSR), continues trading.

Lehman Brothers' collapse offers colder comfort.

Lehman issued three ETNs: Opta Lehman Commodity Pure Beta (Opta Lehman Commodity Pure Beta Agriculture) (RAW), Opta Lehman Commodity Pure Beta Agriculture (Opta S&P Listed Private Equity) (EOH) and Opta S&P Listed Private Equity (Barclays) (PPE). These tracked Lehman indexes made up of commodities futures in raw materials, commodities futures in grains, and the stocks of top private-equity companies, respectively. As Lehman's demise neared, trading in its ETNs thinned out as investors fled for the hills. Now that Lehman is in bankruptcy and selling itself to Barclays (BCS), the ETNs aren't trading and it's likely any remaining investors will get just pennies on the dollar unless Barclays agrees to resurrect the ETNs.

The lesson? "Even though it would appear that most investors escaped with minimal damage, the speed of the deterioration and the speed at which other institutions continue to stumble is worth noting," writes Morningstar analyst Scott Burns. "If faced with a choice between an ETF and an ETN that track the exact same indexes and have similar costs, we would recommend that investors choose the ETF because it doesn't carry the credit risk at all."

Burns notes that Morgan Stanley (MS), which under pressure amid the credit crisis is ditching its investment-banking model along with Goldman Sachs (GS) to become a commercial bank, sponsors four currency ETNs.

All told, there are close to 100 ETNs out there with over $6 billion under management, compared with $600 billion in ETFs. Most of the banks behind them are still considered credit-worthy, including Barclays, Deutsche Bank (DB) and UBS (UBS). But then again, American International Group (AIG) "was considered in good standing until about a week and a half ago," Burns writes. "So keep the credit risk in mind when choosing your investments."