Part 5: "On the surface, ETNs don’t look much different than ordinary mutual or exchange-traded funds that track a group of companies. Both products allow investors to bet on the performance of anything from the U.S. stock market to the Swiss franc to wheat. But unlike ETFs, ETNs don’t own the assets they track. They are debt instruments. And the banks that issue them often have the option to take them off the market if their value falls below a certain level.
One reason ETNs have been hit hard in recent months as that many are leveraged, meaning they use borrowed money to amplify both gains, which also magnifies losses. Instead of rising 3% on a day that crude oil rises 3%, an oil ETN with three-times leverage aims to rise 9%. And instead of falling 3% on a down day, it would fall 9%.
It is “investing on steroids,” said Todd Rosenbluth, director of ETF and mutual-fund research at CFRA, an investment-research firm.
Some products layered complex strategies on top of each other. James Zhu, a 78-year-old retired college professor and engineer, invested his and his wife’s life savings into ETNs based on payment streams from mortgage bonds, bundled together by investment firms and amped up with leverage.
{end of part 5]
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