The ETN/ETF Debate: Not Just One Lonely Voice

By Murray Coleman

Perhaps I wasn't clear enough in my "rant" ... these are issues that people in the industry are talking about, and I'm listening. That's all ...

I'd like to reinforce the concept of journalism here. These blogs are difficult for those of us on the ground, so to speak, covering stories each and every day ... if I used this forum to voice my own opinions, nobody would sit for an interview unless they felt like I was on their side. And that would be a very tiny crowd indeed ...

I'm not taking sides here, as Jim Wiandt suggests. All I'm trying to do is bring up issues that I hear about in the course of doing my due diligence as a reporter and editor. The executives I'm talking to about these issues, right or wrong, have a proven history of putting their customers first. When they speak, I tend to listen.

Given that rambling introduction, I've got to point out some holes I see in some of your responses.

First of all, does your "four-pudding" argument really represent the best interests of most index-minded, long-term investors? It places costs next-to-last in terms of priorities. I'd say a lot of people would put that first.

Along those lines, while ETNs are competitive with many similarly classified ETFs, can't they still be seen as a way to keep moving expense ratios higher, rather than in the opposite direction? I make this observation realizing that in a competitive marketplace, prices tend down rather than up. And while there's much debate about which way expense ratios are going for the industry as a whole, generally ETFs and ETNs are much less expensive than their actively managed mutual-fund counterparts.

The fact is, in every market, there are higher-priced products and lower-priced ones. I've just heard a lot of grousing that ETNs don't necessarily need to land in the higher-priced category all of the time ... the key question here is, why do expenses need to be so high on ETNs if banks and asset managers hold these notes themselves? Wouldn't this streamlining of the process indicate LOWER expense ratios in categories where they've got ETF competition?

Also, on the one hand, you're arguing that issuing notes reduces tracking error. On the other hand, you concede that there are transparency issues with ETNs. Doesn't this present a particularly thorny double standard for investors?

(Not to mention the fact that this line of reasoning seems to be suggesting ETFs have a real problem with tracking error ... not true. Some complexes and some types of asset classes tend to have more difficulty than others ... but to indicate that all ETFs have tracking error hiccups would seem like a gross overgeneralization, wouldn't it?)

Finally, it just seems like the three negatives you list to summarize the differences between ETFs and ETNs really DON'T equate to one major issue ... can you really reduce all of this debate into a single discussion centering on credit risk?

By the way, I've heard others try to associate notes used for years by institutions in addressing the ETN marketplace ... but that's not an apples-to-apples comparison. There are a lot of different types of notes out there and they tend to be even less transparent and more illiquid than anything we're dealing with open to retail investors ... so let's not go there!

Comments

[Alpha Seeker]

this is the worst article

[adan]

i'm confused :-)

[Panskeptic]

Perhaps this article could be revised or extended to include the arguments being rebutted. If you're just coming into the room with this one, it's not clear what's being refuted.