Why Do These Exist?
For ETF industry observers, it begs the question: Why do these exist? The answer turns out to be simpler than you might expect. Again, notice that seven of these ETPs at the bottom are exchange-traded notes, all from Barclays.
Last year, we saw a list of 128 ETF/ETN closures, and nearly all—if not all—had more assets than the 10 listed above. So why are these zombie products—wasting away in assets while offering up trading surprises because they are so illiquid they sweat sand—still walking through exchanges?
“We believe ETNs can survive longer in the market with limited assets, as they do not license an underlying index the way many ETFs do,” said Todd Rosenbluth, director of ETF and mutual fund research at CFRA, an independent research firm. “While Barclays’ priorities likely focus on other businesses, we think they are not regularly reviewing their product lineup the way iShares or SSgA does.”
‘Dirt Cheap To Actually Run’
“The way to think about ETNs from an issuer perspective is all about the cost to them,” said Elisabeth Kashner, director of ETF research at FactSet. “In most cases, ETNs are dirt cheap to actually run, as there are no portfolio managers to pay. All they have to do is be willing to bear the risk of meeting a potentially unpredictable payout. In general, banks issuing ETNs hedge this risk internally, as part of their overall risk management operation.”
According to Kashner, these ETNs “are all extremely easy to hedge in the futures market, with the exception of SOP [ProShares UltraShort Oil & Gas Exploration & Production]. The total exposures are so tiny that the day-to-day risk amounts to a rounding error on the risk desk’s book. “
Of course, Barclays is one of the world’s largest and oldest banks, and so be it if they want to maintain “dead ETNs walking.”