The Wall Street Journal‘s Ian Salisbury is reporting that Barclays has suspended issuing new shares of the iPath MSCI India Index Exchange Traded Note (INP).
The move comes after Indian regulators barred Barclays from trading off-shore derivatives. Because INP managers use derivatives to replicate the returns of the underlying index, the regulatory action forced the Barclays decision.
Forbes‘ Scott Woolley writes that investors who like ETNs for their favorable tax treatment and access to unusual asset classes should also consider their unique risks.
In the article The Trouble with ETNs, Woolley dubs the unique risk as the Lehman effect. Turns out that before the firm went bankrupt, Lehman introduced an exchange traded product that tracked the 30 stocks in the S&P Listed Private Equity Index. Since the product was structured as debt, noteholders were forced to join the line of other unsecured creditors when Lehman went under.
Since they have a claim on the underlying assets of their funds, ETF investors don’t share the same degree of credit risk as ETN investors.
Woolley highlights 5 ETNs in the column including:
GS Connect S&P GSCI Enh Commodity TR ETN (GSC) — Commodities
iPath Global Carbon ETN (GRN) — Carbon Derivatives
iPath MSCI India Index ETN (INP) — Indian Stocks
iPath S&P 500 VIX Short-Term Futures ETN (VXX) — Stock Volatility Index
PowerShares DB Gold Double Long ETN (DGP) — Gold
SmartMoney’s Paulette Miniter warns investors that the appeal of exchange traded notes or ETNs has faded in light of the current credit crisis.
In the article, Banks’ Woes Make ETNs Too Risky Right Now, Miniter points out that ETNs are backed by the creditworthiness of the bank or investment company that issued them. Their cousins, ETFs, do not come with credit risk because they are backed by underlying securities.
Theory turned into reality with the bankruptcy of Lehman Brothers, a sponsor of three ETNs that have stopped trading and will likely be delisted.
According to the article, the four largest ETNs are:
