Exchange Traded Notes & Credit Risk

B

Bear Plunger

Can someone explain to me if ETNs could be more risky than ETFs?

For example let's compare USO & DXO...ignore the leverage part of DXO.

The risk I am talking about is the possibility of losing all your capital.
 
Yes ETN is more risky because of counterparty risk.

DXO will go to zero if oil drops 50% in a month, starting from the first day of every month, if I remember correctly.
 
Actually I think that was a real concern for dxo the december drop had been so severe that traders had thought that there was a real chance of it happening. A real chance for the etn to go zero.

The jan 1 reset is the reason I think that the stock hasn't droped much even though oil is back at 35

By the way this etn is only upto 2038 I mean if anybody plans to hold it long. Which I trust nobody will cause this should never be used as a buy and hold.
 
Thanks guys this helps to explain it to me. These ETNs are a little strange. Illiquid?

Are these new brainstormed financial instruments that will blow up one day like the mortgage shit?
 
Bear - hope to try and shed some light. We looked into ETNs about a year back and I'll ask the "masterminds" why we chose to go the ETF route over the ETN route.

Biggest difference is obviously one letter - ETN versus ETF… Note versus Fund. Notes are debt instruments and the biggest point that I make note of is that the credit-worthiness of the issuer factors in to the rating of the notes whereas an ETF is a share that is issued and backed by stock & derivatives giving the shareholder only counterparty and investment risk where the ETN holder has the same counterparty risk and in addition has the credit-worthiness of the issuer to worry about as well.

My personal opinion on DXO & Powershares is that Powershares is credit worthy enough for me to invest – but that’s based on my opinion of the brand… Ford & GM are also big name brands.

BENG – Both ETNs and ETFs use counterparties, that’s how the fund manager gets market exposure for the shareholder/note holder. It is my understanding that especially with leveraged products (ETFs and ETNs) that both use counterparties to get market exposure using swaps and derivatives. Also, you say “in a month” is DXO a daily beta fund or a period beta fund – does it seek the return of an index on a daily basis or longer?

Bear – sounds like DXO is a period beta ETN whereas the ETF USO is a daily priced 2x leveraged ETF. Assuming that DXO is also 2x leveraged but on a monthly basis, you would choose the monthly or period beta fund for a long term investment/play to avoid the effects of daily compounding while you’d choose the daily beta ETF for shorter term plays where you understand the compounding and volatility risks.
 
Quote from winstontj:

Bear - hope to try and shed some light. We looked into ETNs about a year back and I'll ask the "masterminds" why we chose to go the ETF route over the ETN route.

Biggest difference is obviously one letter - ETN versus ETF… Note versus Fund. Notes are debt instruments and the biggest point that I make note of is that the credit-worthiness of the issuer factors in to the rating of the notes whereas an ETF is a share that is issued and backed by stock & derivatives giving the shareholder only counterparty and investment risk where the ETN holder has the same counterparty risk and in addition has the credit-worthiness of the issuer to worry about as well.

My personal opinion on DXO & Powershares is that Powershares is credit worthy enough for me to invest – but that’s based on my opinion of the brand… Ford & GM are also big name brands.

BENG – Both ETNs and ETFs use counterparties, that’s how the fund manager gets market exposure for the shareholder/note holder. It is my understanding that especially with leveraged products (ETFs and ETNs) that both use counterparties to get market exposure using swaps and derivatives. Also, you say “in a month” is DXO a daily beta fund or a period beta fund – does it seek the return of an index on a daily basis or longer?

Bear – sounds like DXO is a period beta ETN whereas the ETF USO is a daily priced 2x leveraged ETF. Assuming that DXO is also 2x leveraged but on a monthly basis, you would choose the monthly or period beta fund for a long term investment/play to avoid the effects of daily compounding while you’d choose the daily beta ETF for shorter term plays where you understand the compounding and volatility risks.
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Ya bud - but honestly I don't really like trading USO or DTO or DXO. I really beleive if you want to trade oil, you have to trade the NYMEX oil, it's the only way to go. The liquidity is simply INSANE in that market. In all the time when I was trading oil, in hundreds of trades, I probably only had 2 ticks of slippage. It's such a precise market.

I would like to look into spreads trading in futures one day - but I don't really understand what it's about.
 
Quote from winstontj:

BENG – Both ETNs and ETFs use counterparties, that’s how the fund manager gets market exposure for the shareholder/note holder. It is my understanding that especially with leveraged products (ETFs and ETNs) that both use counterparties to get market exposure using swaps and derivatives. Also, you say “in a month” is DXO a daily beta fund or a period beta fund – does it seek the return of an index on a daily basis or longer?QUOTE]

When Lehman went bankrupt, their related ETFs were not affected, but the ETNs became worthless.

DXO is a "daily beta fund"... if I understand you correctly, at any point it goes down 50%, DXO goes to zero, doesn't need to wait till month end. Again, if I remember correctly...
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I think we're talking about the same thing. I don't fully understand the exposure model of an ETN - as soon as BHO's speech is over I'll ask the guys and let you know

As far as why the Lehman ETNs were worthless that's because an ETN is an issued note and the credit worthiness of the issuer is important. LB could not make due so there ETNs failed.
 
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