Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Life Sciences Biotech Smaller Cap High Risk Stocks Investing Binge - 24th Jun 21
Central Banks to Keep Buying Gold - 24th Jun 21
Will Gold Survive Hawkish Fed? - 24th Jun 21
The Clean Energy Compound That Could Change The World - 24th Jun 21
Everybody's Getting Rich (and Having Fun) Except Me - 24th Jun 21
WESTERN DIGITAL WDC Stock Trend Analysis - CHIA! - Risk 1 - 23rd Jun 21
AMC Is the Best-Performing Stock in America: Don’t Buy It - 23rd Jun 21
Stock Market Calling the Fed‘s Bluff - 23rd Jun 21
Could Bitcoin Price CRASH Target A Bottom Below $7500? - 23rd Jun 21
Bitcoin and cryptos: Your 'long-term investment'? - 23rd Jun 21
Unlocking The Next Stage Of The Hydrogen Boom - 23rd Jun 21
USDT Ponzi Scheme FINAL WARNING To EXIT Before Tether Collapses Crypto Exchange Markets - 22nd Jun 21
Stock Market Correction Starting - 22nd Jun 21
This Green SuperFuel Could Change Everything For the $14 Trillion Shipping Industry - 22nd Jun 21
Virgin Media Fibre Broadband Installation - What to Expect, Quality of Wiring, Service etc. - 21st Jun 21
Feel the Inflationary Heartbeat - 21st Jun 21
The Green Superfuel That Could Disrupt Global Energy Markers - 21st Jun 21
How Binance SCAMs Crypto Traders with UP DOWN Coins, Futures, Options and Leverage - Don't Get Bogdanoffed! - 20th Jun 21
Smart Money Accumulating Physical Silver Ahead Of New Basel III Regulations And Price Explosion To $44 - 20th Jun 21
Rambling Fed Triggers Gold/Silver Correction: Are Investors Being Duped? - 20th Jun 21
Gold: The Fed Wreaked Havoc on the Precious Metals - 20th Jun 21
Investing in the Tulip Crypto Mania 2021 - 19th Jun 21
Here’s Why Historic US Housing Market Boom Can Continue - 19th Jun 21
Cryptos: What the "Bizarre" World of Non-Fungible Tokens May Be Signaling - 19th Jun 21
Hyperinflationary Expectations: Reflections on Cryptocurrency and the Markets - 19th Jun 21
Gold Prices Investors beat Central Banks and Jewelry, as having the most Impact - 18th Jun 21
Has the Dust Settled After Fed Day? Not Just Yet - 18th Jun 21
Gold Asks: Will the Economic Boom Continue? - 18th Jun 21
STABLE COINS PONZI Crypto SCAM WARNING! Iron Titan CRASH to ZERO! Exit USDT While You Can! - 18th Jun 21
FOMC Surprise Takeaways - 18th Jun 21
Youtube Upload Stuck at 0% QUICK FIXES Solutions Tutorial - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations Video - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations and Trend Analysis into Market Correction - 17th Jun 21
Stocks, Gold, Silver Markets Inflation Tipping Point - 17th Jun 21
Letting Yourself Relax with Activities That You Might Not Have Considered - 17th Jun 21
RAMPANT MONEY PRINTING INFLATION BIG PICTURE! - 16th Jun 21
The Federal Reserve and Inflation - 16th Jun 21
Inflation Soars 5%! Will Gold Skyrocket? - 16th Jun 21
Stock Market Sentiment Speaks: Inflation Is For Fools - 16th Jun 21
Four News Events That Could Drive Gold Bullion Demand - 16th Jun 21
5 ways that crypto is changing the face of online casinos - 16th Jun 21
Transitory Inflation Debate - 15th Jun 21
USDX: The Cleanest Shirt Among the Dirty Laundry - 15th Jun 21
Inflation and Stock Market SPX Record Highs. PPI, FOMC Meeting in Focus - 15th Jun 21
Stock Market SPX 4310 Right Around the Corner! - 15th Jun 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Potential Dangers of Investing in Exchange Traded Notes (ETN's)

InvestorEducation / Exchange Traded Funds Feb 07, 2009 - 07:38 PM GMT

By: Money_and_Markets

InvestorEducation

Diamond Rated - Best Financial Markets Analysis ArticleRon Rowland writes: Mike Larson is off today, so he asked me to fill in for him. And one thing that I think Mike and I both agree on is that ETFs, or exchange traded funds, are one of the best things that ever happened for small investors.

You may already know about the advantages they have over conventional mutual funds … liquidity, low costs, transparency, diversification, and more.


What you may not know is that there is a new investment that looks a lot like an ETF but is actually a whole different species. I'm talking about ETNs: exchange traded notes.

On the surface, ETNs share many of the characteristics of ETFs. You can buy and sell them on the stock exchange throughout the day, their performance closely mirrors an index, and they give you access to specialized market niches like commodities and currencies.

However,

There is One Gigantic Difference … An ETN Is Really a Bond!

That's why they're called “notes” rather than “funds.” Yet it usually doesn't pay interest at a fixed rate, like say a Treasury bond would. Instead your “interest” is the return on a designated index.

Let's look at an example:

The iPath S&P GSCI Crude Oil ETN (OIL) is very popular right now. It's designed to track the return of a crude oil price index. This gives you a way to participate in the crude oil market without using more complicated and risky tools like futures.

When you buy the OIL ETN you're not buying oil. You're buying a promise from the issuer to pay you some date in the future.
When you buy the OIL ETN you're not buying oil. You're buying a promise from the issuer to pay you some date in the future.

When you buy the OIL ETN, are you actually buying oil? No, you're not. What you are buying is a promise from the issuer — British banking giant Barclays, the corporate parent of iPath — to pay you a return linked to the performance of the Goldman Sachs Crude Oil Return Index at some date in the future.

So with OIL you don't get any oil, directly or indirectly. All you get is a promise from Barclays Bank that you'll be repaid when the ETN matures, with no claim on any particular assets. You are now an unsecured creditor of Barclays.

This brings up another question: What guarantee do you have that Barclays Bank will be around to make good on its promise? Answer: none.

If Barclays should fail for any reason — even something completely unrelated to this particular ETN — the promise you bought could go up in smoke. You'll be just another creditor when the bankruptcy court divides up whatever is left of Barclays.

Now compare this to an ETF …

In the U.S., ETFs are regulated under the Investment Company Act of 1940. They are chartered as separate corporations. The ETF's board of directors hires a manager to keep things going and you, as an investor, own shares of the corporation.

Before Lehman Brothers went belly up, it launched three ETNs in early 2008. All three have bit the dust.
Before Lehman Brothers went belly up, it launched three ETNs in early 2008. All three have bit the dust.

If the manager of an ETF goes bankrupt, what happens to the assets of the ETF? Nothing. There might be a temporary disruption while the board finds a new manager, but the underlying stocks, bonds or other instruments in the fund will be secure. Not so with an ETN.

Think it can't happen? It already has!

The now-defunct Lehman Brothers launched three ETNs in early 2008 under the “Opta” brand name. The ticker symbols were EOH, PPE and RAW. Look them up and you'll find they aren't around anymore.

When Lehman failed in September, owners of those three ETNs found themselves holding the short end of the stick. Now their money is tied up in one of the most complicated bankruptcy cases ever. It could be years before they get anything back, if ever.

There are other examples, too. Investors in a Bear Stearns-issued ETN narrowly escaped the same fate last year when that embattled company was taken over by JP Morgan Chase.

Even scarier, most of the major ETN issuers are not exactly as stable as the Rock of Gibraltar. Far from it. Going back to our Barclays example, BCS stock has been cut in half in just the last month.

Barclays stock has been smashed to pieces

Why? Analysts think Barclays is so shaky the U.K. government may have to nationalize it. The company has taken billions in write-downs on the same kind of toxic derivatives that are bringing down other large banks.

Just this week, Moody's Investor Services downgraded Barclays debt — which includes all the iPath ETNs — to Aa3 from Aa1. Traders reacted by demanding wider bid-ask spreads on iPath ETNs, which means investors owning those ETNs could take a shellacking.

I'm not just picking on Barclays here. All the banks that issue ETNs are having similar problems. Other top ETN issuers include …

  • Deutsche Bank (DB)
  • Morgan Stanley (MS)
  • Goldman Sachs (GS)
  • Swedish Export Credit Corp (FUE)
  • HSBC Bank (HBC)

Would you loan your money to any of these companies? That's exactly what you are doing when you buy their ETNs! Yet most of them are so weak they've had to be bailed out by the government and/or the Federal Reserve in the last few months.

So …

Am I Saying You Should Always Avoid ETNs?

No. I believe that they can provide a way to trade in markets that are hard to access otherwise. What I'm saying is that you need to understand the risk you are taking before you buy.

Sadly, many investors have no idea that they are accepting this kind of credit risk when they buy an ETN. They think it is just a new kind of mutual fund. They don't know they can lose their money even if their market predictions are totally accurate.

What's even more infuriating is that the ETN issuers don't always go out of their way to let people know the difference between ETFs and ETNs. Barclays at least had the good sense to market their ETFs and ETNs under two different names: iShares = ETFs; iPath = ETNs.

Other companies leave it up to you to know what you're buying. You see “PowerShares” in the name and assume you are buying an ETF. Not so — some ETNs carry the PowerShares name.

Nor is it clear which bank is behind which ETN — sometimes it varies even within the same ETN family. So you have to dig through the prospectus to find out exactly who is getting your money.

Even Morningstar, the very pillar of unbiased fund data, lumps ETFs and ETNs into the same category in their database. Worse, they don't always include “ETN” in the fund names.

What Should You Do?

I suggest avoiding ETNs completely if there is a very similar ETF available. And if you do buy an ETN, make sure you aren't exposing too much of your portfolio to any one ETN sponsor — and keep an eye on the issuing companies.

Right now there are roughly 87 ETNs available to U.S. investors. I don't have enough space to list them all here, but I'm giving you a list below that shows some of the larger ones. Refer to this list — and know what you're buying.

TOP 10 ETNs by Assets
as of 12/31/08
iPath DJ-AIG Commodity Index Total Return (DJP)
PowerShares DB Crude Oil Double Long (DXO)
iPath MSCI India Index (INP)
PowerShares DB Gold Double Long (DGP)
iPath S&P GSCI Crude Oil (OIL)
ELEMENTS Rogers Agriculture (RJA)
Market Vectors 2X Short Euro (DRR)
Goldman Sachs Connect S&P GSCI (GSC)
ELEMENTS Rogers Total Commodity (RJI)
iPath DJ-AIG Livestock (COW)

Best wishes,

Ron

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Matthew joynes Bsc MA barrister
09 Feb 09, 04:12
economics / currencies

Here is the weather forcast for the future Feb - May -

Market Volatility (clouds) will continue expect some rain (profit) if you short the market. Sunshine will prevail GBP will lead a revival against Euro/ Dollar on cloudy days only [as its a cheap bet (if your a dollar punter)]. The sun will set on the land of the rising sun (GDP will fall) and China will be beset by political hurricanes(increased unemployment) and South America will be becalmed in storm of tranquil poverty...Euro land will feel a freeze as the realise GBP droped a devaluation on them and have to buy UK debt otherwise they will be frozen in the headlights of an un-competative EURO which will run them over like a bunny in the cheap market of bets in NY!!


Post Comment

Only logged in users are allowed to post comments. Register/ Log in