Here’s an edited WSJ article saying that ETNs at failed banks will lose all value:
Trouble at Barclays Raises ETN Worries:
Potential for Steep Loses if Bank Defaults
With Barclays PLC’s share price sliding, worries have spread about one product that recently seemed like a hit with Main Street investors: its iPath exchange-traded notes.
In a little over a week, speculation that the British bank could be nationalized sent its U.S.-traded shares down to $3.39 at Thurday’s close from $11.19 on Jan. 12. That raises questions for holders of its ETNs – debt securities designed to track benchmarks of stocks, currencies or commodities – which could face steep losses if Barclays ever defaults on its debt.
Herb Morgan, president of Efficient Market Advisors LLC in Camino Del Mar, Calif., bought iPath Dow Jones-AIG Commodity Index Total Return ETN late last year as part of a tax-planning move for his clients, but he recently made sure he’d completely sold the position.
“I’m really glad we did,” he says. “I think the odds of Barclays getting nationalized are low, but real. Right now, I wouldn’t take my chances with the ETN of any issuer.”
Barclays says investors shouldn’t have cause for concern. The firm recently put out a statement saying it knows no justification for the sharp drop in its stock price and that it expects to post a before-tax profit for 2008.
Barclays adds that iPath ETNs have continued to pull in new money and that issuance is at an all-time high, in part because investors find ETNs are easier to trade and have more predictable risks than swaps contracts do.
Exchange-traded notes, which Barclays invented in 2006, closely resemble exchange-traded funds, except holders of ETNs never own an interest in the investments’ underlying assets as they would with an ETF or a conventional mutual fund.
Instead, an ETN is essentially a promissory note of the bank that issues it, and if the bank defaults, ETN owners must get in line with other creditors.
While Barclays iPath ETNs have been a hit, collecting billions in assets and drawing a number of imitators, the credit risk inherent in ETNs has been a lingering worry ever since Bear Stearns Cos., which also issued ETNs, collapsed last year.
“People are more hesitant to use the ETN structure,” says Morningstar analyst Paul Justice. “At the end of the day, you only get paid back if the bank is solvent.”
While ETNs are supposed to play a role in investors’ portfolios by making it easier to own such difficult-to-hold assets as commodities or Indian stocks, Mr. Justice thinks that case is hard to make in the current climate.
Most holders want that kind of exotic investment to diversify their portfolios. But with ETNs’ value ultimately tied to the credit of a particular issuer, they are getting the opposite: concentrated exposure to a single financial services stock.
“The ETN structure loses its appeal,” he says.
http://online.wsj.com/article/SB123268099044509029.html
I have my little bit of money at TD Banknorth and have been told since it is a Canadian bank it is immune to the problems here in the US. I cannot find any information about its trustworthyness or solidity. At least not on the net
Good ETN info.....
I would be wary of ETFs too especially gold and silver ETFs. No way do they physically control the amount of gold that corresponds to what investors have put into those funds. They have paper claims on physical gold