Market Pulse: ETN buyer beware
Deutsche Bank (DB) fell from a pre-financial crisis high of $153 to $25 in 2009.
Buying opportunity? Nope. It’s lost another 60 percent and is $10.50 now. Deutsche Bank’s abysmal performance isn’t talked about enough because it is too big to fail.
Sure, it is a threat to other banks (especially European banks), but it might also directly affect securities you own. That’s because Deutsche Bank is a big provider of ETNs (exchange-traded notes). Let me explain.
Most everyone has heard of exchange-traded funds (ETFs) and many assume that they are the same thing as ETNs. They aren’t. ETNs look and behave just like ETFs. Both trade throughout the day and give investors easy access to segments of the market.
Whereas ETFs typically track equities, both here and abroad, ETNs often track commodities and futures markets. They give the common investor easy access to difficult-to-reach markets.
The largest ETN is iPath Bloomberg Commodity Index Total Return (DJP). A popular ETN for traders is the iPath S&P 500 VIX Short-Term Futures (VXX). Several of the largest ETNs track Master Limited Partnership indexes.
Now the difference: While ETFs are backed by a portfolio of securities, ETNs are backed by the financial strength of the issuer, typically a bank. If the bank gets into financial trouble, the ETN would suffer (think Lehman). For that reason, ETNs don’t share the popularity of ETFs.
Now back to Deutsche Bank. They are an issuer of ETNs, like DB Agriculture Short (ADZ) and DB Gold Double Long (DGP). Their ETNs are only as secure as Deutsche Bank’s credit. With its stock near single digits, shareholders should be very concerned.
Bottom line: When you buy an exchange-traded product, you should know if it is an ETF or an ETN. ETNs carry more risk. They are only as financially sound as the credit risk of the issuing company. For that reason, I’m not interested.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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