Lisa Dallmer, NYSE Euronext senior vice president, noted that there are $38 billion in commodities-based exchange traded products. Considering this, a nearly $500 million decline doesn’t seem quite as bad.
As far as credit risk, while each ETN has it, we feel that ETNs are overall acting as they should and that the issuers behind them are secure. An ETN is not backed by assets, however. They are unsecured debt by the issuing form and there is credit risk. If an ETN liquidates, there would only be money to give back to investors if there was money left over after the secured creditors were paid.
ETNs may also be victim, like other fixed-income products, to the overexpansion during the bull market, and will face a tough period trying to sell themselves now. The total number of ETNs available ballooned from just four in 2007 to 90 as of August 2008. ETNs are attractive, because they give investors a way to access areas of the markets that were previously off-limits or very expensive. But they’re hurting along with the broader markets these days.
There are many questions about what the future will bring with unknowable answers. Will commodities make a strong comeback? When the market recovers, will investors come back to ETNs? Will investors ever recover from their skittishness about the credit markets? Only time will tell.