Exchange traded notes are not exchange traded funds. ETNs are packaged differently and are even marketed toward a different target audience, critics argue.
As the Securities and Exchange Commission tells banks to provide clearer disclosures on ETNs for retail investors, some banks are contending that the investment products weren’t created for retail use to begin with, reports Yakob Pterseil for Risk. [SEC Seeks to Clarify ETN Disclosures]
“Yes, ETNs can be bought by retail, but typically there will be a broker who’s recommending them, and they’re only recommending them to someone they think is sophisticated and generally institutional,” one New York-based lawyer for issuers said in the article.
ETNs, like ETFs, are listed on an exchange and track an underlying index; however, ETNs are a type of unsecured debt issued by an underwriting bank. [What Are ETNs?]
“You can’t stop pure retail from buying them,” the head of sales for one top-three issuer said in the article. “But with the bespoke products, it’s really the end-clients of the people who developed it who are buying them.”
ETNs were mostly created for targeted institutional investors who can provide the initial seed money for the investment.
“It would require a really well-thought-out distribution strategy because you’re getting into the asset management game,” one head of sales at a major issuer said in the article. “To launch something and hope people will come to it – that’s not going to happen every day.”
While some ETNs were launched into a wide distribution network where anyone can buy them, most underwriting banks have partners or investors already lined up. For instance, the Barclays ETN+ Select MLP ETN (NYSEArca: ATMP) was launched by Barclays together with asset manager Atlantic Trust. ATMP has gathered $293.2 million in assets in a year. [New Barclays MLP ETN Pays Nearly 6% Yield]
“We brought the idea to Barclays, and they helped us refine it,” Atlantic Trust’s managing director Adam Karpf said in the article.
Moreover, brokers and many advisors have kept ETN picks away from the retail side. They don’t necessarily prohibit clients from using ETNs but rather not recommend them, according to a New York-based in-house lawyer.
For more information on exchange traded notes, visit our ETNs category.
Max Chen contributed to this article.