Investors Can Face Peril When ETNs Delist

December 07, 2016

New York (Reuters) – Investors are rushing to get out of a top exchange-traded note before it stops trading publicly, and those who fail to find a buyer may be stuck for years in a widely misunderstood product.

Credit Suisse's $1.1 billion VelocityShares 3x Long Crude Oil ETN (UWTI) is poised on Thursday to become the largest-ever note to be delisted from U.S. exchanges.

Investors hold $22 billion of U.S. exchange-traded notes, which, like debt, constitute a pledge by an issuer. Payouts are based on the performance of the underlying asset, but the notes do not "hold" those assets, unlike ETFs, to which they are often compared.

UWTI is widely used by mom-and-pop investors, many of whom are unaware of these differences and may find out too late, analysts say.

Banks, under regulatory pressure to cut risk since the financial crisis, have been issuing fewer ETNs and delisting existing ones to focus on their core businesses.

No New Redemption Option

It is rare for a delisting to come without a new redemption option for investors who retain the product. Credit Suisse's move may make investors wary of ETNs.

"The benefits of ETNs, in most segments of the market, are not that great," said Michael Iachini, managing director of mutual fund and exchange traded fund research at Charles Schwab Investment Advisory. "It's not a great loss."

Upon delisting, ETF holders are typically paid out in cash, while ETN holders are at the mercy of the issuer. After that, investors looking to sell would be forced to find a buyer "over the counter," where investors are not guaranteed anything close to what the notes are worth.

Several traders and analysts expect Credit Suisse to announce plans to effectively redeem the remaining notes for cash, but the bank has not said whether it would do so.

 

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