Sunday, May 31, 2009

Counter party risk with ETNs.

ETN (exchange-traded notes) has its origins in the ETF (Exchange Traded Funds). ETNs are following main stock indices (S & P500), as well as the sectoral indices (Goldman Sachs Commodity Index).

ETNs are technically debts of the company that issues them. That structure gives them some potential tax advantages which cannot find with ETFs. Yet although their performance is contractually tied to whatever index they're intended to track, ETNs don't have any assets, other than a claim against their issuer for payment according to the terms of the contract. This introduces counter party risk for ETN. ETFs lacks this credit risk as holders can liquidate actual assets if the ETF issuer went bankrupt.

In addition to the annual fee, 0, 75%, ETNs offers zero deviation from the index. Bonds (ETN) can be traded or leave it to the maturity date. The biggest ETN issuer in the UK is Barclays Bank PLC, which has 300 years history, assets over 1.5 trillion dollars and AA credit rating from Standard & Poor's. Despite this seemingly steadfast position, are known examples where the same large institutions have liquidity problems. Examples from the nineties is the Barings Bank, which had similar characteristics as the venerable Barclays Bank, but it led to the bankruptcy after huge losses caused speculators, employed by the bank.

Barclays offers including eight which are linked to commodity indexes (Goldman Sachs Commodities Index (GSCI), Dow Jones-AIG Commodity Index), or directly monitor the various commodities (Goldman Sachs Crude Oil), or exchange rates (iPath ® EUR / USD). Purchase
of EOTN or ETF is a significant portfolio diversification and saves buying individual commodities, as well as fees associated with investing in a mutual fund.


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