Exchange traded notes (ETNs) have been under increasing scrutiny with the current market conditions, and the recent sinking of Lehman Brothers had investors scrambling for answers concerning the default debt associated with notes.
John Spence for MarketWatch reports that Lehman had three ETNs in existence at the time of the company defaulting on its debt, meaning any holders would have to stand in line with other unsecured creditors. Actually, there was very little trading in the ETNs at the time, and the $15 million combined in the notes was likely to be seed money.
So, what about the Morgan Stanley-backed currency ETNs? Along with Goldman Sachs, the two moved to become bank holding companies. Because ETNs represent a promise by an institution to pay an index return, the promise is only as strong as the issuer is.
As it stands now, ETNs represent about 10% of the more than $600 billion held in the U.S. exchange traded fund (ETF) industry.
ETFs operate a bit differently. They represent a stake in an investment portfolio. If a sponsor went under, at worst the investors would receive cash or the shares.
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