Why Investors Are Ostracizing ETNs

The disposition of assets and market losses have resulted in exchange traded notes (ETNs) to be ostracized.

ETNs are debt instruments that promise to yield a rate of return equal to an index, less applicable fees.  They are similar to exchange traded funds (ETFs) in that they are traded like stocks, but differ, in that they don’t typically have any underlying assets and issuers rely heavily on derivative strategies to pay off obligations.

ETNs were attractive because they enabled investors to gain access to exotic asset classes such as commodities and currencies, allowed Wall Street firms to sell a product to buy-and-hold individual investors, don’t require additional infrastructure to construct, and aren’t as regulated by the Securities and Exchange Commission (SEC) as traditional ETFs and mutual funds, states Shefali Anand of the Wall Street Journal.

They also come with credit risk, a fact that was painfully illustrated by the failure of Lehman Brothers in September. Not only are advisors and investors shunning away from ETNs, resulting in a 16% decrease in assets, but issuers are doing the same.  A whopping 64 ETNs were launched during the first six months of the year, as compared to only three in the second half of the year.

Although issuers with high credit rankings, such as Barclays PLC and Deutsche Bank AG remain bullish on ETNs and are planning to launch new ones, several market experts and investors believe that it is a long time coming before activity picks up.  In fact, Chance Carson, a financial advisor in Colorado Springs, CO, and the author behind About ETFs has sold almost all of his ETNs and prefers to stick with ETFs.

As long as America and investors look at the financial industry with suspicion and the problems with the credit market persist, ETNs could continue to be viewed with skepticism for the time being. But they are viable investment instruments, so as the market repairs itself, perhaps we’ll see interest in them revived.

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.