ETNs – Riskier Than They Look

January 27, 2009 by  
Filed under Commentary, ETFs, ETNs

Are all of your ETF holdings truly exchange-traded funds?  Or, are some of them exchange-traded notes, otherwise known as ETNs?  Chances are, you might not even know.  However, this knowledge is crucial if you want to get a handle on the risks associated with your holdings.

ETNs are unsecured debt securities – bonds.  Even if your ETN is tracking a stock index or a commodity index, you are still holding a bond, an unsecured note.  If the issuer defaults or declares bankruptcy, you have no recourse except to stand in line with all the other unsecured creditors and hope that some day you might see a partial return of your investment.

Think this is unlikely?  Think again.  On September 12, 2008, Lehman Brothers declared bankruptcy.  ETN owners may not have known it at the time, but Lehman was the issuer of three ETNs (see table of ETN closures below).

This is very different from investing in ETFs.  ETFs are set up as independent legal entities.  The money received by the fund is used to buy securities, and the assets of the fund are kept separate from the issuer and sponsor of the fund.  If the issuer of an ETF goes under, then the fund just hires a new manager.  That structure does not exist with ETNs.

So, how can you tell if what you own is an ETF or an ETN?  The best way of course, is to read the prospectus.  However, I know of far too many investors who have never done that.  Instead, they tend to look at fund summaries and fact sheets.  Others might put their expensive subscription to Morningstar to work.  But guess what, Morningstar does not make a distinction between ETFs and ETNs.  However, Morningstar does append the letters “ETN” to the names of about two-thirds of them.

At the end of 2008, the number of U.S. listed exchange-traded products totaled 845, consisting of 760 ETFs and 85 ETNs.  The comprehensive list of ETNs appears below.  The name of the issuer is often unrelated to the name of the ETN, and in many cases may surprise you.  However, these are the names you need to know, because that is where the risk of default lies.

There are credit ratings available for the ETN issuers.  However, none of those ratings are repeated here due to concerns of accuracy and timeliness.  This is a fast-moving market, and the fate of an issuer can change quickly.  Furthermore, none of the issuers will announce any concerns of ongoing viability for fear of a run on their assets that will surely put them under.

TickerNameNote Issuer
ADZPowerShares DB Agriculture Short ETNDeutsche Bank AG, London Branch
AGAPowerShares DB Agriculture Double Short ETNDeutsche Bank AG, London Branch
AGFPowerShares DB Agriculture Long ETNDeutsche Bank AG, London Branch
AYTBarclays GEMS Asia 8 ETNBarclays Bank, PLC.
BALiPath DJ-AIG Cotton ETNBarclays Bank, PLC.
BDDPowerShares DB Base Metals Dbl Lg ETNDeutsche Bank AG, London Branch
BDGPowerShares DB Base Metals Lng ETNDeutsche Bank AG, London Branch
BOMPowerShares DB Base Metals Dbl Sh ETNDeutsche Bank AG, London Branch
BOSPowerShares DB Base Metals Sht ETNDeutsche Bank AG, London Branch
BSCElements Ben Graham Small Cap Value ETNDeutsche Bank AG
BSRBearLinx Alerian MLP Select ETN(see notes)
BVLElements Ben Graham Large Cap Value ETNDeutsche Bank AG
BVTElements Ben Graham Total Mkt Value ETNDeutsche Bank AG
BWViPath CBOE S&P 500 BuyWrite Index ETNBarclays Bank, PLC.
CNYMarket Vectors Chinese Renminbi/USD ETNMorgan Stanley
COWiPath DJ AIG Livestock Total Return ETNBarclays Bank, PLC.
DAGPowerShares DB Agriculture Double Long ETNDeutsche Bank AG, London Branch
DDPPowerShares DB Commodity Short ETNDeutsche Bank AG, London Branch
DEEPowerShares DB Commodity Double Short ETNDeutsche Bank AG, London Branch
DGPPowerShares DB Gold Double Long ETNDeutsche Bank AG, London Branch
DGZPowerShares DB Gold Short ETNDeutsche Bank AG, London Branch
DJPiPath DJ AIG Commodity Total Return ETNBarclays Bank, PLC.
DODElements Dogs of the Dow Total Return ETNDeutsche Bank AG
DPUPowerShares DB Commodity Long ETNDeutsche Bank AG, London Branch
DRRMarket Vectors Double Short Euro ETNMorgan Stanley
DTOPowerShares DB Crude Oil Dbl Shrt ETNDeutsche Bank AG, London Branch
DXOPowerShares DB Crude Oil Dbl Long ETNDeutsche Bank AG, London Branch
DYYPowerShares DB Commodity Double Long ETNDeutsche Bank AG, London Branch
DZZPowerShares DB Gold Double Short ETNDeutsche Bank AG, London Branch
EEHElements Spec LgCap US Sector Mo ETNSwedish Export Credit Corp.
EROiPath EUR/USD Exchange Rate ETNBarclays Bank, PLC.
FUDE-TRACS CMCI Food Total Return ETNUBS AG
FUEElements MLCX Biofuels ETNSwedish Export Credit Corp.
GAZiPath DJ AIG Natural Gas Total Return ETNBarclays Bank, PLC.
GBBiPath GBP/USD Exchange Rate ETNBarclays Bank, PLC.
GCEClaymore CEF Index GS Connect ETNThe Goldman Sachs Group, Inc.
GOEElements MLCX Gold ETNCredit Suisse
GRNiPath Global Carbon ETNBarclays Bank, PLC.
GRUElements MLCX Grains Total Return ETNSwedish Export Credit Corp.
GSCGS Connect S&P GSCI Enh Commodity ETNThe Goldman Sachs Group, Inc.
GSPiPath S&P GSCI Total Return Index ETNBarclays Bank, PLC.
GWOElements CS Global Warming ETNCredit Suisse
ICIiPath Optimized Currency Carry ETNBarclays Bank, PLC.
INPiPath MSCI India Index ETNBarclays Bank, PLC.
INRMarket Vectors Indian Rupee/USD ETNMorgan Stanley
JEMBarclays GEMS Currency Index ETNBarclays Bank, PLC.
JFTFirst Trust Enhanced 130/30 Large Cap ETNJPMorgan Chase & Co.
JJAiPath DJ AIG Agriculture ETNBarclays Bank, PLC.
JJCiPath DJ AIG Copper ETNBarclays Bank, PLC.
JJEiPath DJ AIG Energy ETNBarclays Bank, PLC.
JJGiPath DJ AIG Grains ETNBarclays Bank, PLC.
JJMiPath DJ AIG Industrial Metals ETNBarclays Bank, PLC.
JJNiPath DJ AIG Nickel ETNBarclays Bank, PLC.
JJPiPath DJ AIG Precious Metals ETNBarclays Bank, PLC.
JJSiPath DJ AIG Softs ETNBarclays Bank, PLC.
JJTiPath DJ AIG Tin ETNBarclays Bank, PLC.
JJUiPath DJ AIG Aluminum ETNBarclays Bank, PLC.
JOiPath DJ AIG Coffee ETNBarclays Bank, PLC.
JYNiPath JPY/USD Exchange Rate ETNBarclays Bank, PLC.
LDiPath DJ AIG Lead ETNBarclays Bank, PLC.
LSCElements S&P Commodity Trends Idr ETNHSBC USA Inc.
LSOElements MLCX Livestock ETNCredit Suisse
NIBiPath DJ AIG Cocoa ETNBarclays Bank, PLC.
OILiPath S&P GSCI Crude Oil Total Return ETNBarclays Bank, PLC.
OLOPowerShares DB Crude Oil Long ETNDeutsche Bank AG, London Branch
PGDBarclays Asian&Gulf Currency Reval. ETNBarclays Bank, PLC.
PGMiPath DJ Platinum ETNBarclays Bank, PLC.
PMYElements MLCX Precious Metals ETNCredit Suisse
PTDE-TRACS CMCI Short Platinum Exc Ret ETNUBS AG
PTME-TRACS CMCI Long Platinum TR ETNUBS AG
RJAElements Rogers Agriculture ETNSwedish Export Credit Corp.
RJIElements Rogers Commodity TotRet ETNSwedish Export Credit Corp.
RJNElements Rogers Energy ETNSwedish Export Credit Corp.
RJZElements Rogers Metals ETNSwedish Export Credit Corp.
SGGiPath DJ AIG Sugar ETNBarclays Bank, PLC.
SZOPowerShares DB Crude Oil Short ETNDeutsche Bank AG, London Branch
UAGE-TRACS CMCI Agriculture TR ETNUBS AG
UBCE-TRACS CMCI Livestock Total Return ETNUBS AG
UBGE-TRACS CMCI Gold Total Return ETNUBS AG
UBME-TRACS CMCI Industrial Metals TR ETNUBS AG
UBNE-TRACS CMCI Energy Total Return ETNUBS AG
UCIE-TRACS CMCI Total Return ETNUBS AG
URRMarket Vectors Double Long Euro ETNMorgan Stanley
USVE-TRACS CMCI Silver Total Return ETNUBS AG
WMWElements Morningstar Wide Moat Focus ETNDeutsche Bank AG
© Copyright 2009, AllStarInvestor.com

Note: BearLinx Alerian MLP Select ETN (BSR) is an unsecured note originally issued by Bear Stearns.  Presumably, this note was assumed by J.P. Morgan Chase as part of their acquisition of Bear Stearns, however we were unable to verify.

TickerNameDisposition
EOHOpta Lehman Agriculture Pure Beta ETNVictim of 9/12/08 Lehman Bankruptcy
PPEOpta S&P Private Equity Notes 2038 ETNVictim of 9/12/08 Lehman Bankruptcy
RAWOpta Lehman Commodity Index ETNVictim of 9/12/08 Lehman Bankruptcy
ADEElements Australian Dollar AUD/USD ETNClosed 11/17/08 w/ orderly liquidation
CUDElements Canadian Dollar CAD/USD ETNClosed 11/17/08 w/ orderly liquidation
EGBElements British Pound GBP/USD ETNClosed 11/17/08 w/ orderly liquidation
EREElements Euro EUR/USD ETNClosed 11/17/08 w/ orderly liquidation
SZEElements Swiss Franc CHF/USD ETNClosed 11/17/08 w/ orderly liquidation
© Copyright 2009 AllStarInvestor.com

Disclosure:  Long some of the listed securities.

Comments

2 Responses to “ETNs – Riskier Than They Look”

  1. PETE HENKEL on August 27th, 2009 7:37 am

    UNDER THE LIST OF ETN CLOSURES, THE CURRENCY RELATED ONES SAY 11/17/09. IS THIS A TYPO OR IS THIS A FUTURE DATE?

  2. Ron Rowland on August 27th, 2009 8:16 am

    Thanks Pete. The date for those closures was 11/17/2008. The table is now updated to show the correct date.