The argument for exchange-traded notes [ETNs] gets stronger every day.
Barclays Bank has changed the policy on its iPath ETNs to allow daily redemptions at net asset value [NAV], rather than weekly, as was originally the case. Barclays Managing Director and Head of Investor Solutions, Americas, Philippe El-Asmar, says the firm had originally thought a weekly redemption schedule was reasonable to allow the ETN market to develop and that the conversion to daily redemptions demonstrates Barclays' commitment to the success of its ETNs.
"We wanted to make the ETNs even more attractive to investors and to give investors better liquidity and also better transparency with regard to the frequency of creations—and to make ETNs as close as possible to ETFs. ETFs have daily creation and redemptions, and now ETNs have the same feature as well," El-Asmar adds.
ETNs trade like ETFs, but are actually debt instruments. The notes promise to deliver the exact return of an index, minus fees, and convey certain tax advantages over traditional ETFs. As debt instruments, however, they come with credit risk: If Barclays Bank were to implode, ETN holders would join the line of other creditors looking to recoup pennies on the dollar for their investment.
The move to daily redemption is an important one because it shortens the window of credit exposure for large investors. Now, an investor holding 50,000 shares of an ETN is guaranteed daily liquidity at NAV.
"For any investor, the primary concern when buying an ETN is the credit exposure to the issuer," El-Asmar says. "By moving the creations and redemptions from weekly to daily, the buyer of an ETN can get out overnight, and so they've reduced their credit exposure to a daily exposure to the issuer versus a weekly exposure to the issuer."
The daily liquidity should also help arbitrageurs keep the ETNs closely priced to their NAV on an intraday basis.
"Instead of having a one-day-a-week window, it's a daily window. It allows those investors eliminating the premium or discount— arbitrageurs—to capture that spread overnight because they are capable of trading one day and then getting out the next, whereas before they could only create or redeem on a weekly basis," El-Asmar adds.
The iPath MSCI India Index ETN is currently the only ETN with a redemption fee and the only emerging market ETN (INP) in the iPath family. Barclays charges another 12.5 basis points on top of the investor fee for redemptions because of the higher costs involved in trading Indian securities, El-Asmar says.
Other ETNs from providers like Bear Stearns and Goldman Sachs currently still allow only weekly liquidity. The BearLinx Alerian MLP Select Index ETN (BSR) has a redemption fee of 12.5 basis points.
Written by Matthew Hougan