June 11, 2009 at 6:00 am by Tom Lydon
Exchange traded notes (ETNs) saw their risks highlighted during the market turmoil and major financial institutions collapsed. But now that the markets have stabilized, their backers are hoping investors return to them.
Once Lehman Brothers and Bear Stearns fell victim to the banking woes, ETNs were looked at in a negative light, explains John Spence for MarketWatch.
An ETN is not structured the same as an ETF, hence the cousin comparison. But the two share similarities in that they generally follow indexes and trade on an exchange like a single stock.
Although ETNs did go through a downfall, the total assets in U.S.-listed ETNs is at $5.8 billion recently, or about 10% of the size of the ETF business. Assets in ETNs peaked at about $7.5 billion in July 2008, and bottomed at around $3.5 billion later in the year as the market crashed, according to industry data.
Some wonder whether ETNs can come back, or if their reputation has been too damaged by the credit turmoil. The decline in assets is showing signs of mending, thanks to the correction in commodity and energy prices. But there are still signs that investors remain nervous about the credit risk, even though they’re remote.
ETNs have benefits, though. They track a variety of investments that would otherwise be inaccessible, they have no tracking error and they have tax benefits as well.
The consensus seems to be that ETNs aren’t endangered, but they will require a bit of a recovery period to get back to where they were. But as long as investors recognize what they offer, they could be another useful tool in a portfolio.
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