Market Pulse: ETN buyer beware
My Nov. 9, 2018 article titled “ETN Buyer Beware” warned of the risks of investing in exchange-traded notes. It took a while but problems in those securities are emerging. First a background.
Most everyone has heard of exchange-traded funds and many assume that they are the same 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. But 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 in 2008). For that reason, ETNs don’t share the popularity of ETFs. And their popularity is waning.
ETN assets stand at $8.6 billion, down from $30 billion. Credit Suisse, the biggest ETN sponsor, recently delisted several of their leveraged and inverse ETNs. Their ETN that tracked twice the daily return of the VIX was delisted only to have another company, VolatilityShares, introduce a similar security but in the form of an ETF.
To make matters worse, some of the ETNs were delisted from the NYSE or other exchanges and were moved to pink sheet trading. There’s very little volume there and most individual investors can’t trade stocks in the pink sheets.
So the ETN provider continued to collect management fees while investors couldn’t get out until the ETN was officially closed. Not good.
Are you holding an ETN instead of an ETF and don’t know it? If your exchange-traded product tracks a commodity like oil then it’s likely an ETN. If it uses leverage it might be an ETN as well.
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 issuing company. For that reason, I’m not interested.
David Vomund is an Incline Village-based Independent Investment Adviser. 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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