Finra issues warning on risks of ETNs
The Financial Industry Regulatory Authority Inc. issued an investor alert last week about the risks of exchange-traded notes,…
The Financial Industry Regulatory Authority Inc. issued an investor alert last week about the risks of exchange-traded notes, following an investigation sparked by manic swings of Credit Suisse and Barclays ETNs.
“ETNs are complex products and can carry a raft of risks,” Gerri Walsh, Finra’s vice president for investor education, said in a statement. “Investors considering ETNs should only invest if they are confident the ETN can help them meet their investment objectives, and they fully understand and are comfortable with the risks.”
ETNs typically get lumped in the same category as exchange-traded funds, but in fact, the two vehicles are quite different. Unlike ETFs, which hold a basket of stocks or bonds that trade intraday on an exchange, ETNs are simply promissory notes written by banks to deliver the returns of an index, and don’t actually hold anything.
NO NEW SHARES
ETNs can run into trouble when a bank is forced to stop issuing new shares — either because the maximum number of shares has been reached or the bank is no longer able to hedge effectively against the index. No new shares means the ETN functions like a closed-end fund, and continued demand can drive shares to a premium over the net asset value.
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