Earlier this year, the exchange traded note (ETN) market really began to take root, but now the $6.8 billion market is on shaky ground as the credit risk keeps revealing new obstacles to overcome.
Hannah Glover for Ignites reports that unlike exchange traded funds (ETFs), ETNs are actually debt instruments that offer a return based on the performance of an index. Investing in notes means taking on the counterparty risk.
Investors got a reminder of this risk last week when Lehman Brothers filed for bankruptcy. Barclays has said the purchase of Lehman assets will not include any of the bankrupt bank’s debt, which would include these products. While investors may get some return through bankruptcy proceedings, it is likely to be pennies on the dollar, analysts say.
ETN enthusiasts are sticking to their stories, however, and the commitment remains, especially with the access to commodities, and hard-to-reach areas of the market that help with diversification. New ETN product launches are not expected to be canceled, just put on hold.
Overall, one ETF researcher says that keeping confidence in the ETN market strong will just take stepped-up education efforts. Providers of ETNs that are already on the market remain committed to their products.
Some of the largest ETN providers include:
- Barclays, $5.2 billion
- Swedish Export Credit, $551 million
- Deutsche Bank, $431 million
- UBS, $130 million
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.