ETNs: 3 Reasons They're Shrinking | ETF Trends

Exchange traded notes (ETNs) burst onto the scene in 2006 in hopes that they’d be a new generation of exchange traded products. But in 2009, it looks like the number of ETNs available is shrinking. What gives?

When ETNs first appeared three years ago, they were heralded for their ability to access special markets such as sugar, cocoa and copper. Their flexible structure gave them instant recognition, reports Don Dion for TheStreet. For example, commodity ETNs offer certain advantages over commodity ETFs. ETNs are designed to have no “tracking error” between the product and its underlying index. (The benefits of ETNs).

According to data from the National Stock Exchange, the total number of listed ETNs decreased from 90 in October 2008 to 84 in October 2009. On the positive side, the area has not lost assets: in October, they stood at $7.6 billion, up from $4 billion a year earlier.  (A look at special markets that ETNs track).

But then why is the selection of ETNs shrinking?

  • Since they track notes, which are essentially promises made to investors by banks, they are subject to the credit of the issuing bank. Given the market climate these days, investors may not be comfortable with this risk.
  • Liquidity. Many ideas have looked good on paper, but they have failed to attract investor interest. This lack of interest and assets cause investors to buy at a premium and sell at a discount.
  • The tax treatment of ETNs became an issue after their first year on the market. Many investors were hit hard with hidden or unknown tax obligations. (How ETFs and ETNs are taxed).

For more stories about ETNs, visit our ETN category.

A few of the more popular ETNs:

  • iPath Dow Jones AIG Commodity Index Index (NYSEArca: DJP): up 16.4% year-to-date

  • iPath S&P GSCI Total Return Index (NYSEArca: GSP): up 13% year-to-date

  • PowerShares DB Crude Oil Long ETN (NYSEArca: OLO): up 39% year-to-date

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.