An ETN investor is lender to the issuer of the note, which promises to repay the investor’s principal with interest that is supposedly gauged to the riskiness of the loan. But the issuer’s payment obligation is unsecured, and if the issuer defaults, as Lehman Brothers did, the investor can lose his or her entire investment.
ETNs, like other alternative investments, have many risks and problems including illiquidity, high fees, and lack of transparency. ETNs have all these risks and problems plus credit (default) risk, skewed or abnormal returns and extreme volatility.
Despite being exchange traded, exchange traded notes, like other exotic exchange traded products, often lack a ready pool of buyers and sellers, making them illiquid. Illiquidity subjects an investment to wider price variances than liquid investments, as the bid and ask prices may be widely separated.
Exchange traded notes also come with high fees and expenses that are hidden from plain view. While Morningstar and CNNMoney list fees for exchange traded notes, “ETNs may calculate expenses differently or levy more charges-then bury that information in a pricing supplement to the prospectus,” according to Penelope Wang (“Beware a Risky ETF Look-alike,” CNNMoney). “ETN fees can be extremely hard to find and calculate,” agrees Morningstar ETF analyst Samuel Lee.
Exchange traded notes have become the “go to” choice for extreme and exotic alternative investments, such as leveraged products like the VelocityShares Daily 2X VIX Short-term (TVIX), which purports to deliver double the ups or downs of the VIX index of market volatility. That product is meant for day trading, however, and many investors have been shocked to discover that the ETN does not closely track the index over a longer term.
“The one thing you can know for sure is that ETNs usually make money for the companies that offer them. For investors, not so much,” writes Ms. Wang. Most investors should “steer clear” of exchange traded notes.
The most important of investors’ rights is the right to be informed! This Investors’ Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over , Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors’ rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at email@example.com for answers to any of your questions about this blog post and/or any related matter.