Tag Archives: exchange-traded-notes


SEC Aims To Ban Geared ETFs

The US SEC apparently has its cross-hairs on so-called ‘geared ETFs,’  those high-testosterone, levered instruments that incorporate derivatives so as to deliver an advertised 2x or 3x return for certain strategies versus a typical 1:1 correlation provided by plain vanilla exchange-traded funds.  The SEC proposal would effectively ban the use of those products altogether.

As reported by Ari Weinberg in his most recent column in Pensions & Investments,  SEC staffers are holding further rounds of reviews of proposed rule changes that could effectively eliminate triple-leveraged and triple-inverse ETFs, which totaled 66 funds and $11.3 billion in assets under management as of Jan. 15, according to research firm XTF. Excluding exchange-traded notes, which are not subject to the Investment Company Act, the entire leveraged and inverse ETF universe includes 195 funds and $30.1 billion in assets.

This is not to suggest that  ‘inverse return’ exchange-traded funds are bad (even if many are actually completely unsuitable for most investors),  it’s just that nobody at the SEC seems to understand how they work, despite the fact these products need first be approved by the SEC before they can be issued, and despite the fact the SEC has given its green light to the these derivative-powered exchange-traded notes aka ETNs since they were first conceived and popularized  nearly 15 years ago.  According to one senior investment manager executive  overseeing nearly $10bil AUM and who asked not to be identified in this article, “..The proposed rules being discussed now simply proves that the SEC need not ever understand a financial product before they rubber-stamp the issuance of a financial instrument that would fall under SEC oversight.” He further added, “Its hard to say which is more broken, the SEC or products they allow to be sold to institutional and retail investors.”

“The SEC is responding to a combination of concerns, some of which are well founded and some of which are less well founded. There’s a belief that ETFs create risk because of asset class exposures, high trading volumes and market structure issues,” says Edward Baer, counsel at Ropes & Gray in San Francisco, who recently served as chief legal officer for BlackRock (BLK) Inc. (BLK)’s iShares business.

Geared ETFs, offered separately by ProShares and Direxion Investments, are designed to track two or three times the daily return (or inverse) of an underlying index. Awareness of the products peaked during the volatile days of the financial crisis, but both FINRA and the SEC have repeatedly voiced concerns that the products are misunderstood by many investors or used improperly.

As noted in the P&I story by Ari Weinberg..

In turn, both the SEC and FINRA have stated that regulatory examinations in 2016 will focus on the knock-on effects and risks to authorized participants in the ETF ecosystem. This network of investment banks and trading firms greases the wheels of ETF trading by creating or redeeming shares in the primary market and buying or selling in the secondary market. Their trading is motivated by the profit potential in arbitraging away price discrepancies in the ETF share price and the underlying assets.

“AP activities may … result in pressure on the financial integrity of broker-dealers in some conditions and this, in turn, could impair the liquidity provision function the broker-dealer plays when acting as an AP,” FINRA wrote in its annual examination priorities letter.

Similarly, the SEC’s office of compliance inspections and examinations said that it would focus on ETF compliance with their exemptive relief, as well as sales, trading, and disclosures involving ETFs.

For the full story from P&I, click here


ETFs with a Feminine Flair; $WIL She or Won’t She (Use these ETNs)?

wsjlogoMarketsMuse Editor Note: We so greatly enjoyed today’s WSJ column from Daisey Maxey, we felt compelled to provide extracts below (The entire column can be found by clicking on logo to your left)

Catalyst Inc., a nonprofit focused on increasing opportunities for women in business, issued a report that shows that from 2004 to 2008, Fortune 500 firms with three or more female directors had an 84% better return on sales and a 46% better return on equity.

Call it the XX factor for investing.

It is an intriguing concept: investing in stocks of companies with female leadership. Backed by studies that say such companies perform better, fund companies are stepping in with investments that snub male-dominated companies, and bet on women

Barclays Women in Leadership ETN ($WIL). Investors pay for the privilege. The Barclays ETN charges an annual fee of 0.45% compared with a 0.10% fee for the SPDR S&P 500 ETF. SPY5.LN +0.10% Morningstar is generally not a fan of ETNs, says Mr. Goldsborough, citing credit risks and fees that can be hard for investors to understand.

“Everyone is talking about women in leadership,” says Barbara Byrne, vice chairman in investment banking at Barclays. The London bank has 80-plus ETNs, so the notes were the logical framework, and its research shows market demand, she says.

women inleadershipBarclays isn’t the only firm leaning in. Ellevate Asset Management LLC, owned by Sallie Krawcheck, former high-profile executive at Bank of America Corp. , teamed with Pax World Management LLC in June to launch Pax Ellevate Global Women’s Index Fund. It invests in companies that seek to advance women. The fund is the successor to Pax World Global Women’s Equality Fund, which was merged into it.

There are caveats to ETNs (which are unsecured debt) and to women-focused investing strategies. Female leaders are often appointed in times of poor company performance, so their posts may be precarious, say Michelle Ryan and Alex Haslam, professors at the University of Exeter in the U.K. That “glass cliff” could make such companies less attractive to investors, the researchers say. Continue reading

Volatility Bets and ETNs: Be Careful What You Bet On

wsjlogoExtract courtesy of Spencer Jakab, Wall St. Journal. Full article available via clicking on WSJ logo on left side..

“..Now that volatility has emerged not only as a concept but an investment in its own right, there probably is no putting the genie back in the bottle. And while portfolio managers largely welcome the products, the droves of speculators drawn to VIX notes may be in for a wilder ride than they realize…”

The latest big worry to hit markets is an unusual one: calm. With stock prices high and various gauges of risk low, investors appear to have thrown caution to the wind.

That isn’t entirely true, though. Exchange-traded notes that profit handsomely from market-shaking events have boomed since the financial crisis. But they have two big shortcomings: They may not work as designed in another financial crisis since their value depends on the bank backing them. And due to the way the products work, anyone holding these for the long term will inevitably see their value erode. Continue reading

Credit Suisse Lists Covered-Call Gold ETN; $GLDI w Exposure to $GLD

indexuniverseCourtesy of Cinthia Murphy and Olly Ludwig

Credit Suisse on Tuesday launched its Credit Suisse Gold Shares Covered Call ETN (NasdaqGM: GLDI), a strategy that provides long exposure to physical gold coupled with an overlay of call options.

The ETN, comes with an annual expense ratio of 0.65 percent, will have notional exposure to the bullion ETF SPDR Gold Shares (NYSEArca: GLD) while notionally selling monthly “out of the money” call options, the fund’s prospectus said.

The strategy is designed to enhance current cash flow through premiums on the sale of the call options. Those premiums will be received monthly in exchange for giving up any gains beyond 3 percent a month. In other words, the premiums would soften the blow if GLD were to face a sell-off, but that’s the extent of the fund’s downside protection.

There’s still growing uncertainty in the market on whether the 12-year-long gold rally has run its course, which makes Credit Suisse’s launch of GLDI timely, as the ETN represents a somewhat neutral view on gold.

ETNs are senior unsecured obligations; in this case, of Credit Suisse’s Nassau branch. Unlike ETFs, they have no tracking error, but, also unlike ETFs, they represent a credit risk. For example, if Credit Suisse ever faced bankruptcy, holders of GLDI would likely lose their entire investment.

FINRA Investigating ETNs after Credit Suisse’s TVIX ‘Snafu’

The regulator that oversees the sale of investment products to investors is investigating how firms are marketing exchange-traded notes, a niche product that experienced a market meltdown this year.

A spokeswoman for the Financial Industry Regulatory Authority said Thursday the regulator is “looking at the events and trading” activity surrounding a sharp plunge in the price of an exchange-traded note designed to track stock market volatility.

FINRA began its inquiry after the Credit Suisse-managed VelocityShares Daily 2x Short-Term exchange-traded note, or ETN, lost half its value in just two days earlier this month.

But FINRA’s review is not limited to the volatility ETN, the spokeswoman said. “We have a review underway looking at a host of issues relating to ETNs and other complex products,” the spokeswoman said.

Exchange-traded notes are debt securities issued by banks and were first brought to market in 2006 as a way for sophisticated traders to make bets on different parts of the market.

But recently, retail investors have begun trading ETNs as one way to get exposure to popular sectors of the market like silver, gold and natural gas.

To be sure, the dollar value of ETNs is small, roughly $18 billion. The volatility ETN managed by Credit Suisse, for instance, had about $700 million in assets at its peak. By contrast, the dollar value of better-known exchange-traded funds, or ETFs, is $1.2 trillion.