The Financial Industry Regulatory Authority is out with a warning on exchange traded notes in yet another public-relations setback for the ETN industry.
“Investors should understand that an ETN’s market price can deviate, sometimes significantly, from its indicative value,” FINRA said. “If the ETN is trading at a significant premium to its closing or intraday indicative value, investors might want to consider similar products that are not trading at a premium.” [Master Limited Partnership ETN Trading at Premium After Creation Halt]
ETNs are often grouped together with exchange traded funds, or ETFs, because both financial products are bought and sold on exchanges. However, they have several key differences such as credit risks. [ETNs are Not ETFs]
“ETNs are a type of debt security that trade on exchanges and promise a return linked to a market index or other benchmark. However, unlike ETFs, ETNs do not buy or hold assets to replicate or approximate the performance of the underlying index,” FINRA explained.
In other words, ETN investors are exposed to the credit risk that the issuer goes bankrupt. ETN issuers are financial institutions.
“ETNs are complex products and can carry a raft of risks. Investors considering ETNs should only invest if they are confident the ETN can help them meet their investment objectives and they fully understand and are comfortable with the risks,” said Gerri Walsh, FINRA’s Vice President for Investor Education, in a press release. [A Primer on Exchange Traded Notes]
Investors received a harsh lesson on the risks of the financial products earlier this year when VelocityShares Daily 2X VIX Short-Term ETN (NYSEArca: TVIX) quickly lost half of its value when its premium collapsed. [TVIX Washout Raises Questions Over ETNs]
FINRA started investigating how companies were marketing ETNs after the TVIX debacle. [ETF Providers Call for More Product Transparency]
“ETNs can offer investors convenient and cost-effective exposure to everything from commodities to emerging markets, but they can be complex and carry numerous risks—including the risk that the issuer will default on the note or take other actions that may impact the price of the ETN,” FINRA said in the investor alert released Tuesday.