Dave Nadig, CIO and Director of Research at ETF Trends and ETF Database, and Chris Hempstead, director of institutional business development at IndexIQ, talk exchange-traded note delistings and the risks they pose to investors on “ETF Edge” with CNBC’s Bob Pisani.
In explaining what’s happening with ETNs as far as being delisted but not liquidated, and if this is a problem for ETF investors, Nadig explains that it is an issue. As credit suites had many ETNs created under the velocity suites brand, with leverage on various forms of exposure, they decided they wanted to get out of the business. However, instead of just shutting the products down, they closed them for new money and then de-listed them.
This means they took them from where they were with Nasdaq and pushed them into the pink sheets. The volume then dries up from there, as many investors can’t trade from the pink sheets. And yet, these funds still have, in some cases, hundreds of millions of dollars trapped inside of them, and investors don’t have much of a way to get out.
Nadig continues, “I think this is a big issue for the industry. Most of these were held by institutions, not by retail investors. But my email box has folks that are trapped in some of these things as well. So, it is an issue. What this means is that you’ve got to pay attention, and know what you own and why you own it, and not get caught blindsided when someone decides they want to de-list a product.”
Why Pink Sheets
Jumping over to Hempstead in regards to the value of keeping these products on the pink sheets, he explains how if the plan is to abandon the product, in a sense, from an efficiency standpoint, then it is basically like orphaning it at the bank. The other thing to keep in mind is how, unlike an ETF, these ETNs don’t have a board. As a result, there’s no oversight committee to look over those things.
So, these banks are very accustomed and familiar with creating custom products and custom strategies for their institutional and high network clients. These ETNs figure they can plan similarly, put it out there, and see what happens. However, they get left behind without any accountability, making it a problem, as once they get turned off for creation and redemption, they lose the efficiency they’re accustomed to in exchange-traded products.
The bottom line for the companies though, is they’re still making money on them. As argued by the group, they should have just been shut down, rather than still collecting fees on them.
As Nadig notes, “It’s incredibly anti-consumer. It just hurts investors. There’s no reason for this other than the greed of the issuer.”
Watch Dave Nadig and Chris Hampstead Talk ETNs:
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