DB Gold Double Long ETN (DGP)

[frenchee]

Are ETNs in Trouble?

January 27, 2009 at 2:00 pm by Tom Lydon

Speculation has arisen the Barclays could be nationalized, which raises a big question for holders of its line of iPath exchange traded notes (ETNs).

The New York Times recently reported that Barclays would be cutting 2,100 jobs within their investment banking and wealth management division. This news comes at a sour time. Many banks have lost money in the last year, some have collapsed altogether. As debt instruments backed by the creditworthiness of their issuer, this has some wondering about the safety of these ETNs. It was illustrated earlier this year after Lehman Brothers went bankrupt, creating anxiety amid the ETN industry, reports Joe Morris for Ignites.

Holders of the notes could face dire losses if the issuing bank defaults, reports Ian Salisbury for The Wall Street Journal. One advisor noted that the odds of Barclays getting nationalized are low, and for its part, the bank says investors shouldn’t have cause for concern.

One strategist notes in an ETF Update from Janney Montgomery Scott that nationalization does not create an event for the default of debt, and that governments would provide support for any “systematically important” financial institution, instead of allowing it to default on senior debt.

The bank issued a statement regarding the fact that the iPath ETNs continue to pull in assets and that issuance is at all-time highs. The bank says this is because ETNs are easier to trade and have more predictable risks than swaps contracts. Barclays also nots that on Feb. 17, it expects to report a profit before tax and beat analyst estimates.

As with every investment product, investors need to do their research and understand what they’re getting into. It’s important to determine if you are comfortable with the risks. Some investors are, some aren’t.