ETN Providers, Investors Act With Prudence, Not Panic

September 24, 2008

No one is panicking, but the credit crisis has cast a pall over the ETN marketplace.


The credit "brand" image problem that has struck the exchange-traded note market has, at least temporarily, put a hard stop on plans by Invesco PowerShares to launch ETNs. The same caution is now being evinced by financial advisors, who are not pulling out of existing investments, but watching them closely and are most likely steering clear of ETNs with new investment dollars.

The ETN market has grown from 11 funds to 92 funds in the past year alone, and advisors had been investing in ETNs, primarily for commodities, country, and currency exposures. While it has been logical to speculate that the credit crisis' wake would extend to ETNs, now the proof is surfacing in comments from asset managers like PowerShares and financial advisors.

This week, published reports also indicated that Barclays Capital would not own up to the unsecured debt in three Lehman Brothers ETNs—not surprising, but still, adding to the credit brand problem for all ETNs. had previously reported on a looming D-Day (D for Destruction, or D for baD Debt, pick your poison) for the Lehman ETNs (see story).

PowerShares CEO Bruce Bond told that it has put a stop to a planned launch of ETNs, for the foreseeable future. He said the asset manager had some ETNs in the pipeline, though he did not specify asset classes, and he explained that it just doesn't make sense in the current market to go ahead with the ETN plans.

Cautious, Not Hysterical 

Talking to financial advisors, it is not hard to see why PowerShares—or any ETN distributor—would be pulling back the reins on that previously popular asset class. While the advisor sentiment seems to be cautious as opposed to hysterical as far as existing ETN investments, advisors say that in areas where they were considering ETNs for new investments, those investments are not now likely to occur.

Take Pittsburgh-based Legend Financial Advisors, where James Holtzman, advisor and shareholder, has been using ETNs to gain exposure for clients to commodities, countries and currencies. He had been planning to look at ETNs for new investments, and said that when an advisor is building a portfolio with ETNs, one has to assume that credit-related events could occur.

However, the question now for advisors, Holtzman explained, is whether an investment strategy that makes sense outweighs an uncertain credit environment. And it is harder to make the argument that being mindful of a provider's credit rating can even put an advisor's fears at ease.

"One day the CEO says the firm is minimally exposed and the next day they are filing for bankruptcy, so now you can make the argument that a credit rating won't even tell you anything," Holtzman said.

Legend Financial committed assets to ETNs in a measured way because the product space was new, and so it has only a small percentage of assets in ETNs. "We did that on purpose because we didn't want to be too crazy about a new product, and because there were already problems in the credit cycle back when we first invested," Holtzman explained.

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