Thursday, March 27, 2008

More on ETNs

After posting our March 10 blog on Exchange Traded Notes (ETNs), a reader posted a question regarding the advantage of ETNs over Exchange Traded Funds (ETFs). In truth, there are only small advantages and disadvantages to each form of security and as a shareholder you likely won’t notice any difference between the two.

The advantage of ETNs is that they eliminate tracking error between the security and the index that it follows. ETFs have some, albeit small, movement away from their underlying indexes. For buy-and-hold investors there may be a tax advantage in ETNs as you can defer capital gains and income until the day you sell your investment. Then again if you need income distributions then ETFs have the advantage.

The disadvantage of ETNs is that they are secured by senior debt notes. Although a company like Barclays with $1.5 trillion in assets is very dependable, it will never be as safe as a central bank. If Barclays and other ETN issuers are forced to close their doors then we’ll have more problems than our ETN holdings!

I treat ETFs and ETNs the same. If I’m looking to trade a commodity and an ETN choice has more liquidity, then that is where I’ll go. There is a good web site called ETNCenter.com with lots of good information on ETNs.

David Vomund
www.ETFportfolios.net

Tuesday, March 18, 2008

Market Stress


Today the Dow rose 300 points even before the Federal Reserve announced it will lower interest rates. A couple days ago stocks were falling because of a run on Bear Stearns. Without emergency Fed intervention, there may have been other runs on investment banks.

The market is volatile, and people’s portfolios are in the red. How does a portfolio manager react to these events? I reach for my Investor Anxiety Reliever pills (more accurately known as jelly beans!).


High emotions lead to bad trading decisions. Market lows occur when people, including myself, want to throw in the towel and sell everything. Instead of liquidating it would be better to buy more, but that is hard to do. Just think how many people were bullish when the Dow was at 14,000 compared to now when the Dow is 2000 points lower. It’s backwards.


This is a bear market but we finally know that the parts of the government that count (the Federal Reserve and the Treasury Department) are now engaged. The market will get through this, just like it did with the Savings & Loans crisis, but in the meantime it isn’t fun. Those who bet on worst-case outcomes will be wrong (again).


In the meantime, the market will be volatile (wow, what a bold prediction!). The more you trade the worse off you may be. So sit back, have some Investor Anxiety Pills, and look for a better second half of the year!

Monday, March 10, 2008

Exchange Traded Notes

The general public is gaining awareness of exchange-traded funds (ETFs), but few have heard of exchange-traded notes (ETNs). That will likely change.

ETNs are similar to ETFs, but they take a different approach. Whereas ETF buyers own shares which represent a stake in a portfolio that holds a basket of assets, ETNs are long-term debt securities issues by the ETN parent company. They promise to pay investors the return of a particular index, minus fees. The good news is ETNs will track the market index. The bad news is it places credit risk on the investors.

To this point only iPath (of Barclays Global Investors) has offered ETNs. These have become popular because they track commodities, a hot area of the market. A few days ago, however, Lehman Brothers announced they are introducing a line of ETNs. Goldman Sachs is also a player. This almost insures that ETNs is where the market is going. Keep watch on this development and you heard it here first!

David Vomund
http://www.etfportfolios.net/