Credit: Shutterstock photoCinthia Murphy, Managing Editor, ETF.com
Every exchange-traded product comes to market with the goal of being a success story. But sometimes they don’t quite make it, and failing to attract a following, they slowly wither and ultimately shutter.
ETP closures do happen—we often see more than 100 exchange-traded funds and/or exchange-traded notes close every year. A good warning sign that an ETP may be headed for closure is lack of assets and lack of liquidity. At ETF.com, we track ETF launches and closures, and this year, we’ve already seen 125 ETPs close.
Perhaps one of the most memorable rounds of closures—and one that became a cautionary tale for investors who own ETNs, specifically—was the Lehman Brothers ETN fallout.
It’s been 10 years since Lehman Brothers fell into bankruptcy, but investors who owned any of the firm’s three ETNs at that time were left in limbo, and a decade later, never quite recovered their assets. The ETNs included the Opta Lehman Brothers Commodity Index (LBCI) Agriculture Pure Beta Total Return Index ETN (EOH); the Opta S&P Private Equity Index Net Return ETN (PPE); and the Opta LBCI Pure Beta Total Return Index ETN (RAW).
As ETF.com’s Lara Crigger reported this week on the anniversary of the company’s fall, crucial here is the distinction between what an ETF is and what the ETN structure is.
ETNs are unsecured debt obligations. That means they are an uncollateralized loan that you, the investor, makes to the issuing bank. In exchange, the bank promises to track the performance of a given index, less management fees. If the bank becomes unable to meet that promise, however, investors have little recourse in getting their money back. Lehman ETN investors have yet to recover more than half of their claims even after all these years.
The event cast a long shadow on the ETN wrapper itself. But ETNs have hardly gone away. Today they are widely used in the volatility and leverage/inverse strategy segments.
More on ETF.com:
Behind Currency Hedged Emerging Market ETFs
Weekly Flows Show Flight To Safety
ETF Of The Week: Long Term Treasuries Hot
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
