Its official name was Barclays ETN+ Short B Leveraged Exchange Traded Notes Linked to the Performance of the S&P 500 Total Return Index (BXDB). What the name didn’t tell you was the magnitude of the leverage, that the leverage was never reset, and early termination was practically inevitable. However, these items were highlighted in my initial analysis when the product was launched in 2009.
On April 4, 2014 BXDB’s indicative value dropped below $10, triggering an early termination stop loss. Barclays issued a press release that day announcing the early termination and declared the ETNs would have a redemption value of $10.00 on April 11. However, BXDB would not halt trading until its delisting after the market close on April 10.
Nearly five days of trading took place between the freezing of the liquidation value at $10.00 and the actual redemption. Market regulators do not require sponsors or exchanges to warn potential investors about broken products, and unwitting investors paid as much as $10.20 and sold for as low as $9.90 during the interim.
Unless special mechanisms like early termination triggers are used, “no-reset” ETPs have the potential of their value going below zero. Therefore, products like BXDB include stop-loss provisions and other means of triggering an early redemption. Of the five ETNs Barclays launched in this series, only the two “long” products remain.
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.