5 ETNs You Don't Need (GAZ, VXAA, GRN)
In the days following the now infamous VelocityShares Daily 2x VIX Short-Term ETN (NYSE: TVIX) debacle, some old facts were brought back to light. Those being the critical differences between ETFs and exchange traded notes or ETNs that investors need to be aware of.
Remember: ETN's are bond instruments, not funds, and though ETNs pay no interest the way a corporate bond or a U.S. Treasury does, by purchasing shares of TVIX or any other ETN, investors thereby become unsecured creditors of the issuing bank. While not likely, it's not impossible either that investors can be exposed to credit risk with ETNs.
There were 212 ETNs on the market at the end of March, according to data from the ETF Industry Association. Some are alive, thriving and doing what they're supposed to do. Others, not so much. In fact, there are plenty of ETNs investors might just want to pass on for a variety of reasons. Starting with the...
iPath DJ-UBS Natural Gas TR Sub-Idx ETN (NYSE: GAZ) Arguably more than any other ETN not named TVIX, GAZ has been the focus of intense scrutiny since late March because this natural gas product also has a reputation for trading at prices that are well above its indicative value. Not only that, but natural gas prices have only started to show signs of life in the past few days.
Unless you're planning to short GAZ or buy puts on it, it's dangerous to mess with this thing. Trading at over $4 today means the ETN is more than double its indicative value. Buyer beware.
iPath Global Carbon ETN (NYSE: GRN) Two reasons to avoid GRN beyond the obscure nature of the carbon theme. First, the ETN doesn't trade all that frequently. The last time it did was Wednesday April 25. If that doesn't keep you away, this should: GRN has plunged more than 66% in the past year.
VelocityShares 2x Long Copper ETN (NYSE: LCPR) Much like GRN, the VelocityShares 2x Long Copper ETN doesn't get around to trading everyday. When we wrote about LCPR because of its slightly elevated market price to indicative value on March 23 in the wake of the TVIX disaster, the copper ETN hadn't traded since March 15. LCPR hasn't traded since last Monday. And when LCPR does trade, it usually goes done. The ETN has lost more than 15% since its February debut.
UBS E-TRACS 1-Month S&P 500 VIX Futures ETN (NYSE: VXAA) VXAA has everything. Everything one doesn't want in an ETN. A 0.85% annual expense ratio that accrues daily. An obscure, complex concept. VXAA trades a decent premium to its indicative value. Well, we should say when it trades. VXAA is another member of the "don't trade everyday club." Last trade: April 25.
ETRACS Monthly 2xLeveraged ISE Cloud Computing TR Index ETN (NYSE: LSKY) If the critics of exchange-traded products becoming too narrowly focused, the ETRACS Monthly 2xLeveraged ISE Cloud Computing TR Index ETN might provide some ammunition for that argument. Indeed, the First Trust ISE Cloud Computing Index Fund (Nasdaq: SKYY) has done well for itself, raking in almost $88 million in AUM since its July 2011 debut. However, the cloud computing investment theme is just starting to kick into high gear and does not merit a leveraged ETF or ETN at this point.
To be fair, LSKY is up over 37% year-to-date and it does trade more regularly than some of the other products on this list, but if you want to dabble in cloud computing, do with it individual stocks or SKYY.
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