Barclays’ cull of 21 ETNs places construction on shaky floor in US

Barclays’ determination to axe virtually half of its trade traded observe vary seems to be eroding assist for the construction within the US, however evaluation reveals ETNs are displaying resilience in Europe.

ETNs — born and bred within the US — are unsecured debt obligations issued by a sponsor, sometimes a financial institution, which promise to ship the returns of an underlying funding publicity in return for a payment.

They are sometimes lumped into the booming $10tn trade traded fund sector. Although not technically ETFs, they each come below the umbrella of trade traded merchandise.

ETNs have endured a rocky few years within the US, although, typically pushed by their esoteric, high-risk exposures.

In 2018 Credit Suisse’s brief volatility XIV ETN was killed off after collapsing 90 per cent in at some point. Two years later the Swiss financial institution, then the most important ETN sponsor, delisted and suspended 9 leveraged and inverse ETNs.

In March 2020, WisdomTree needed to shut its thrice leveraged oil merchandise after their worth was worn out by Covid-induced market volatility.

Last yr Barclays, then the business quantity two, needed to droop creation of recent models throughout most of its ETN vary for a number of months after inadvertently exceeding the $20.8bn of structured observe issuance (together with ETNs) it had regulatory approval for by $15.2bn.

Now Barclays has unveiled plans to shut 21 of its 50 New York-listed iPath ETNs, providing publicity to commodities from copper to espresso, in June.

The affected ETNs accounted for $517mn of the $1.7bn held within the iPath vary on the finish of March, in response to Morningstar Direct knowledge.

Shilpa Akella, head of equities structuring for the Americas at Barclays, stated the UK financial institution was “focused on a core set of products and services that match client interest and demand”, and remained “firmly committed to building a leading position in global equity exchange traded products”.

Akella added that the ETNs because of be axed “represent a very small amount of notional in our overall portfolio and of our revenue”. She didn’t rule out the potential of Barclays launching new ETNs if the demand was there.

The closures will reduce the variety of US-listed ETNs to 125, in response to Morningstar, a far cry from the height of 221 in 2019, at the same time as ETFs have grown at a ferocious tempo.

US property below administration have additionally tumbled, from a peak of $27bn in January 2018 to only $11bn on the finish of March. Alarmingly, Morningstar knowledge level to web inflows of $32.3bn since 2006, suggesting greater than $20bn of worth destruction as a result of underlying exposures.

The scenario in Europe is considerably more healthy, although. Admittedly the variety of ETNs has fallen much more sharply from a peak of 270 in 2019 to only 94, after 233 merchandise have been scrapped in 2020.

However, property have held steadier, at $17.3bn, not far beneath the zenith of $20.1bn in March 2022. As a end result, Europe has been the bigger market since mid-2020. Europeans have additionally been extra profitable with their investments, with cumulative $8.7bn of web inflows which means they’ve, on common, doubled their cash.

The differing outcomes might largely be all the way down to regulation. In the US, ETNs are dominated by commodity and leveraged and inverse exposures, though the world’s largest observe, the $2.6bn JPMorgan Alerian MLP ETN, invests in grasp restricted partnerships.

Europe additionally has quite a lot of leveraged and inverse ETNs, however the construction seems to have discovered a distinct segment in with the ability to supply publicity to an array of cryptocurrencies, led by bitcoin and ether. Such buildings are barred by the Securities and Exchange Commission within the US.

Analysts are, although, downbeat on ETNs’ prospects of a comeback.

Kenneth Lamont, senior fund analyst for passive methods at Morningstar, stated they “they have a place” in that they “can provide some exposures that may not be available in an ETF”, resembling to a single commodity, though unfold betting is usually a viable various.

However, on the draw back “there is an additional layer of risk, over and above the exposure that you are getting”, within the type of counterparty danger with the issuing financial institution.

“They service a market need, but most investors should not really be looking at them,” Lamont stated. “They offer fringe exposures. They have always been a bit Wild West. Are they dead? No. Are they the future? Probably not.”

Nate Geraci, president of The ETF Store, stated ETNs had some potential advantages over ETFs within the US, resembling “better tax efficiency, tighter benchmark tracking and the ability to traffic in areas that are difficult for investors to access”. 

Nevertheless, he questioned whether or not the common investor actually wanted publicity to triple-leveraged distinguished know-how shares resembling Apple, or triple-leveraged inverse gold mining shares. “Issuers can say these products are geared towards more sophisticated investors, but they often end up in the hands of unwitting retail investors,” he added.

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Moreover, Geraci stated “it seems that investors continually play second fiddle to the whims of issuing banks”, which might redeem ETNs at will.

“From a broader industry perspective, I worry that ETNs are giving the entire ETF industry a bad name,” Geraci added. “Whenever ETNs are in the headlines, it’s typically for negative reasons.

“I’m a strong proponent of providing investors greater access to financial markets, but the combination of banks’ poor track record of supporting these products, the potential credit risk and the outlandish exposure has me in the camp that ETNs should be put out of their misery.”