Barclays Halts Creation of Its No-Reset -3x S&P ETN
Barclays announced 2/9/11 that it has temporarily suspended “sales from inventory” of the Barclays ETN+ Short D Leveraged Exchange Traded Notes Linked to the Inverse Performance of the S&P 500® Total Return Index (BXDD). If you know what those are, you are part of a very small group.
Since these are ETNs, the suspension of “sales from inventory” is tantamount to a halt in share creation. BXDD is now trading as a closed-end note and is subject to trading at wide premiums and discounts to its underlying value. It closed today at $15.90, a +3.2% premium to its $15.41 value.
When Barclays launched these notes, I criticized them for the obtuse naming they applied. In the Barclays parlance, “Short D” means -300%. However, don’t fall into the trap of thinking the +300% notes are named “Long D,” because for some strange reason those are known as the “Long B” notes. As a small sign of protest, I decided to boycott the official names and vowed to use something more descriptive and understandable.
Another item that is confusing to many investors is the fact that these were the first leveraged exchange-traded products that did not reset their leverage. Even though they were launched in 2009, I saw many reviews declaring Barclays’ December 2010 product launch as the first no-reset products on the market.
Confusing names + confusing leverage = ETF Deathwatch. You can see BXDD and BXDC prominently displayed in the latest edition of ETF Deathwatch.
Unlike ETFs and ETNs that reset their leverage, the underlying value of no-reset products can potentially go below zero. Since they are not path dependent, a 50% gain in the S&P would result in a -150% return in a -3x note. Daily, monthly, and quarterly reset products prevent this from happening.
Since BXDD can’t extract more money from investors than they put into the product, it needs another self-destruction mechanism. That mechanism is a termination clause that states the notes will be automatically redeemed if the value drops below $10. BXDD was issued at $50, is now at $15.90, and is quickly approaching the termination level. If the bull market continues, then it’s just a matter of time.
If you find yourself in need of more information on this subject, then I suggest the BXDD suspension press release of 2/9/11, BXDD pricing supplement and prospectus (pdf), BXDD overview page, BXDD fact sheet (pdf), Barclays ETN+ FAQ (pdf), and ETN+ Short Notes Brochure (pdf).
Disclosure covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.