In the days following the now infamous VelocityShares Daily 2x
VIX Short-Term ETN (NYSE:
) debacle, some old facts were brought back to light. Those being
critical differences between ETFs and exchange
traded notes or ETNs
that investors need to be aware of.
Remember: ETN's are bond instruments, not funds, and though
ETNs pay no interest the way a corporate bond or a U.S. Treasury
does, by purchasing shares of TVIX or any other ETN, investors
thereby become unsecured creditors of the issuing bank. While not
likely, it's not impossible either that investors can be exposed
to credit risk with ETNs.
There were 212 ETNs on the market at the end of March,
according to data from the ETF Industry Association. Some are
alive, thriving and doing what they're supposed to do. Others,
not so much. In fact, there are plenty of ETNs investors might
just want to pass on for a variety of reasons. Starting with
iPath DJ-UBS Natural Gas TR Sub-Idx ETN (NYSE:
Arguably more than any other ETN not named TVIX, GAZ has been the
focus of intense scrutiny since late March because this natural
gas product also has a reputation
for trading at prices that are well above its
. Not only that, but natural gas prices have only started to show
signs of life in the past few days.
Unless you're planning to short GAZ or buy puts on it, it's
dangerous to mess with this thing. Trading at over $4 today means
the ETN is more than double its indicative value. Buyer
iPath Global Carbon ETN (NYSE:
Two reasons to avoid GRN beyond the obscure nature of the carbon
theme. First, the ETN doesn't trade all that frequently. The last
time it did was Wednesday April 25. If that doesn't keep you
away, this should: GRN has plunged more than 66% in the past
VelocityShares 2x Long Copper ETN (
Much like GRN, the VelocityShares 2x Long Copper ETN doesn't get
around to trading everyday. When we wrote about LCPR because of
its slightly elevated market price to indicative value on March
23 in the wake of the TVIX disaster, the copper ETN hadn't traded
since March 15. LCPR hasn't traded since last Monday. And when
LCPR does trade, it usually goes done. The ETN has lost more than
15% since its February debut.
UBS E-TRACS 1-Month S&P 500 VIX Futures ETN (
VXAA has everything. Everything one doesn't want in an ETN. A
0.85% annual expense ratio that accrues daily. An obscure,
complex concept. VXAA trades a decent premium to its indicative
value. Well, we should say when it trades. VXAA is another member
of the "don't trade everyday club." Last trade: April 25.
ETRACS Monthly 2xLeveraged ISE Cloud Computing TR Index
If the critics of exchange-traded products becoming too narrowly
focused, the ETRACS Monthly 2xLeveraged ISE Cloud Computing TR
Index ETN might provide some ammunition for that argument.
Indeed, the First Trust ISE Cloud Computing Index Fund (Nasdaq:
) has done well for itself, raking in almost $88 million in AUM
since its July 2011 debut. However, the cloud computing
investment theme is just starting to kick into high gear and does
not merit a leveraged ETF or ETN at this point.
To be fair, LSKY is up over 37% year-to-date and it does trade
more regularly than some of the other products on this list, but
if you want to dabble in cloud computing, do with it individual
stocks or SKYY.
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