Are ETNs Finally Coming Of Age?

December 30, 2010

Is the growing popularity of ETNs sustainable, or has 2010 just been a VIX-related blip?

The success of a number of exchange-traded notes this year, including two that canvass the market of VIX volatility futures and others offering investors exposure to master limited partnerships, is raising the question of whether ETNs are about to truly take off and become part of every investor’s portfolio.

ETNs, unlike ETFs, offer investors direct exposure to an underlying index, minus expenses. They don’t own underlying baskets of securities like ETFs do, which not only eliminates tracking error but also gives ETNs access to parts of the investment universe that are hard to cover.

The catch—and it’s been a big one since the market crash of 2008, 2009—is that ETNs are unsecured credit obligations backed only by the faith and good credit of their issuers. If an issuer goes under, investors essentially forfeit their entire investment. That chance seemed very remote when ETNs first launched in 2006, and perhaps it’s fading today. Some issuers say investors are getting over fears and are now curious about ETN attributes, including tax advantages.

“I am very confident that we’re going through what I’m calling ‘The Big Thaw’ when it comes to exchange-traded notes, and I think it started with the VIX products that iPath brought,” Bryon Lake, senior product strategy manager at Wheaton, Ill.-based Invesco PowerShares, said in a telephone interview. “We’re getting more questions and more feedback from investors that are looking for and are comfortable with the exchange-traded note.”

ETNs represent about $14.5 billion out of the $1 trillion invested in exchange-traded vehicles, according to data compiled by And, inflows are building momentum: $1.21 billion in 2008; $4.18 billion in 2009 and almost $6 billion in 2010. Moreover, while ETN assets are less than 1.5 percent of total assets in exchange-traded products, the number of ETNs on the market is 131, or almost 12 percent of the 1,101 ETPs now listed in the U.S.

"It's clear that 2010 was the year of the ETN," said Keith Styrcula, chairman and founder of the Structured Products Association, a New York-based trade group with its finger on the pulse of developments in the world of ETNs. "With the proliferation of new issues and new issuers, the ETN came into its own as a liquid, tax-efficient investment vehicle."


Top Gainers ($, Millions) 2010's Most Popular ETNs as of Dec. 29
Ticker Name Issuer Flows AUM ($, M) Turnover
VXX iPath S&P 500 VIX Short-Term Futures ETN Barclays Capital 2,591.07 1,692.04 119,135.19
AMJ JPMorgan Alerian MLP ETN JPMorgan Chase 1,229.85 2,255.00 6,148.97
VXZ iPath S&P 500 VIX Mid-Term Futures ETN Barclays Capital 700.23 695.89 7,977.51
DJP iPath Dow Jones-UBS Commodity Total Return ETN Barclays Capital 322.65 2,822.92 3,995.61
MLPI UBS E-TRACS Alerian MLP Infrastructure ETN UBS 180.51 194.27 243.62
RJI ELEMENTS Rogers International Commodity - Total Return ETN ELEMENTS 141.84 662.92 872.68
MLPN Credit Suisse Cushing 30 MLP Credit Suisse 94.13 121.30 377.98
RJA ELEMENTS Rogers International Commodity - Agriculture Total Return ETN ELEMENTS 90.57 517.06 890.05
UCI UBS E-TRACS CMCI Total Return ETN UBS 81.81 129.99 54.94
JJG iPath Dow Jones UBS Grains Sub Total Return ETN Barclays Capital 80.59 188.89 973.92


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