You're both right. There are two broad classes of exchange-traded products (ETPs): exchange-traded funds (ETFs) and exchange-traded notes (ETNs).
ETFs have a creation-redemption mechanism [1]. This keeps tracking error [2] low. It also forces ETFs to actually hold their component stocks.
Some clever financial engineers noticed they could approximate most of an index's performance with a few names and some clever trading. They issue ETNs. These are notes issued and backed by usually an investment bank that promise to pay interest in a way linked to an index. They have no requirement to hold the index's constituents.
ETFs have a creation-redemption mechanism [1]. This keeps tracking error [2] low. It also forces ETFs to actually hold their component stocks.
Some clever financial engineers noticed they could approximate most of an index's performance with a few names and some clever trading. They issue ETNs. These are notes issued and backed by usually an investment bank that promise to pay interest in a way linked to an index. They have no requirement to hold the index's constituents.
[1] http://www.etf.com/etf-education-center/7540-what-is-the-etf...
[2] https://en.m.wikipedia.org/wiki/Tracking_error