Barclays iPath ETNs “Drying Up”, Investors Not Informed

Some of these products’ liquidity is dissolving as the provider dithers on its next move  

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Editor, etf.com Europe
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Reviewed by: Rachael Revesz
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Edited by: Rachael Revesz

Retail investors have been left in the dark and even unable to buy and sell certain exchange traded notes (ETNs) issued by Barclays iPath as market makers have stopped quoting prices to trade and the bank has not informed investors of its next steps regarding the product range. This sheds a spotlight on the potential danger of this type of instrument.

Adam Laird, passive investment manager at discount broker Hargreaves Lansdown, said he was alerted to the lack of liquidity by investors that wanted to trade these ETNs, but could not find a quoted price.

Laird said: “Investors in the iPath ETNs have been left without the ability to trade for long periods of time and Barclays have not kept investors updated.”

Appetite “Dries Up”

He pointed to the iPath S&P 500 VIX Short-Term Futures Index ETN (VXIS), which holds retail investors and which has fallen over 37 percent in the last year in a low volatility environment. It was launched in 2011.

An institutional trader, who did not want to be named, said Flow Traders, a large liquidity provider, had retracted its pricing for VXIS and was considering retracting pricing for all the iPath products as investor “appetite had dried up”. However, Barclays approached the company and requested them to keep making a price.

“Flow Traders will continue to make markets until Barclays decides what to do with these products,” he said.

However, Flow Traders will not directly help the retail investor with small amounts to trade.

Winterflood Securities is one of the few market makers that continues to price some of these products on a daily basis, to help out a small number of its retail investors – VXIS has £9.1 million worth of shares outstanding at the time of writing.

Odd Activity

A market maker specialising in retail trading, who spoke anonymously, said that this (temporary) absence of a committed prinicpal – someone who guarantees to provide continuous two-way orders – and a lack of trading in these ETNs “[…] is the oddest thing I have seen in five years. Normally providers just delist a product and that’s fine.”

A portfolio manager, who is also not named, said: “When they [Barclays] launched iPath the ETNs seemed like a good idea, but no one in the Barclays bureaucracy wants ownership of iPath or its failing products at the moment. If they could get rid of them they probably would.  It is not so much an ETN problem than a Barclays problem."

There are a total of 13 iPath ETNs on the London Stock Exchange (LSE). The LSE requires all committed principals to post a price the vast majority of the time. It also stipulates that a trade should not move the price more than a certain amount from the price of the preceding trade, to prevent any large price movements in the market. But trades in an iPath ETN, on exchange, could happen weeks or months apart, and therefore the price is likely to move more than what would usually be accepted by the LSE. This could delay or halt trading for retail investors.

Beware In The Retail World

Adam Laird also warned about the general use of ETNs in the retail world, as they tend to follow esoteric strategies like commodities or derivatives, and are debt structures, rather than funds. Many are not collateralised and are exposed to the bank that issues it.

“Individuals should approach ETNs with caution,” he told ETF.com “Before investing, check the structure and make sure you really understand the asset class and the risks. With ETNs, this might involve reading through a lengthy prospectus, but this is worth it if it avoids the problems that can arise in cases like this.”

Barclays declined to comment.

Rachael Revesz joined etf.com in August 2013 as staff writer. Previously an investment reporter at Citywire, she has a background in writing content for retail financial advisors and has covered a wide range of subjects in finance. Revesz studied journalism at PMA Media, which has since merged with the Press Association. She also holds a B.A. in modern languages from Durham University, as well as CF1 and CF2 financial planning certificates from the CII.