Surprisingly, there hasn’t been much discussion or analysis of ETNs (Exchange Traded Notes) in the aftermath of Credit Suisse disaster.
The ETNs are DEBT obligations of the ISSUER/sponsor. So, the health of the issuer is critical for the ETN holders. Yet, in all of the discussions of Credit Suisse issues, its ETN exposure wasn’t even mentioned. This even as in the UBS takeover/rescue of Credit Suisse, almost $17 billion of AT1/CoCo debt was extinguished by government order (a credit-event was declared) when that was ahead of the common stock (that finally had some residual value). But because it wasn’t an outright bankruptcy, the Credit Suisse ETNs should be OK for now as the debt obligation of Credit Suisse will become the debt obligations of UBS.
https://www.mutualfundobserver.com/discuss/discussion/comment/161485/#Comment_161485 Another risk of ETNs is that their CREATION/REDEMPTION mechanisms may be disrupted by the issuer, or the ETN may be discontinued/liquidated in what may be very UNTIMELY for the ETN holders. Some ETNs are +/- 2x or even +/- 3x that further magnify risks (they escaped the recent ETF reforms to limit LEVERAGE).
Credit Suisse US ETNs include those for gold, silver, oil, MLP with AUM of under $500 million (tickers for Credit Suisse related stuff are avoided here as those may change). UBS also has ETNs related to equity and HY bonds with AUM under $200 million. It is unclear if UBS will maintain Credit Suisse ETNs.
No news is good news?
https://ybbpersonalfinance.proboards.com/post/985/thread
Comments
ETN's as an alternative to ETF's
A good source for ETFs/ETNs is ETFdb.com . On this site, everything is referred to as ETFs, and ETNs are referred to as "ETFs with ETN structure". At Yahoo Finance, Morningstar, etc, it isn't easy to figure out if something is an ETF or ETN (if that isn't in the name). So, you can see how confusion may arise for these very different things.
Moreover, there are ETN fans who like them because there aren't any tracking errors in whatever the market sectors the ETNs are dealing with.
But remember that ETFs do hold somethings (stocks, bonds, futures, other ETFs or CEFs), but ETNs don't hold ANYTHING. They are debt or IOUs of the issuer who promises to pay returns calculated on some index for a fee. And the issuer can restrict or shut the ETN on a very short notice - main consideration there is the liability exposure of the issuer, not the interests of the ETN holders.
I recall 10-20 years back, that some 'stable value' choices found within 401k/403b plans may have contained ETN products; synthetic bonds, so to speak; as I named them.
--- The bonds in such a fund are sometimes called "wrapped" bonds, referring to the fact that they are insured. The insurance is commonly issued in the form of a so-called synthetic guaranteed investment certificate (GIC). ---
During the 2008 melt, a friend received a letter stating that 'one shouldn't be concerned about the safety of their underlying 'stable value fund'.
At the time, even some insurers were not very stable. No back up for the back up, for the back up. The musical chairs problem and who is remains without a chair.
Wondering today about ETN's stuff inside such funds.
The SVs from insurance companies may be supported directly by their general accounts, or they may be portfolios of bonds at 3rd parties with an insurance wrapper.
The SVs from fund firms may just be pools of GICs, BICs and short-term Treasuries/agencies. I have written to some and asked how they will cover losses if there were any, and their answer was that they are just very careful and conservative. But no explicit guarantees from any insurance company or from the firm to step in case of trouble.
The SVs are available within the workplace retirement plans only where clauses to prevent runs, etc, can be implemented. For example, they may be frozen during company-wide restructurings; many don't allow moving money into competing options directly (but only after "equity-wash"); they may also not pay in full for employees who are let go for causes, etc. This is why they aren't offered in IRAs as there is no mechanism there for such restrictions.