Boo-Ya for David Merkel

By Murray Coleman

David Merkel published a piece today taking a shot at our (Index Universe's) latest blogs on ETNs.

He starts out by reminding everyone he's written about ETNs before (at Jim Cramer's RealMoney hangout, no less... boo-ya!). Then, he takes a jab directly at us: "Now, today, I find it funny to see other retail investment commentators catching up with the credit risk angle of ETNs."

Note: Part of this sentence is linked; clicking on it leads to Jim's latest blog on ETNs...

Even though it was far before my time here, even I realize that these issues were hotly reviewed and discussed from the first day ETNs came on to the scene at IndexUniverse. That was in June 2006 when Barclays registered with the SEC to issue its first iPaths. (I know this because I was covering ETFs exclusively for another publication at the time and considered it my business to keep up with these sorts of developments.)

Not counting all of the other IU blogs between Matt Hougan and Jim Wiandt, as well as the articles that've appeared in its sister publications, the Journal of Indexes and ETFR (Exchange-Traded Funds Report), I'd say Mr. Merkel's a little off base in referring to this latest blogging thread as "catching up."

I'd also like to remind anyone keeping score that these blogs were started by me... and as anyone who has been reading can attest, my knowledge and understanding of everything exchange-traded falls far below that of my colleagues here at IU.

I blogged ‘cause it seemed like a pressing and very relevant issue to many... I thought our esteemed staff's expertise could help shed some more light on these issues... I didn't mean to suggest they hadn't been addressed before. That's a generalization I'd expect to be made about a mass-circulation-minded publication.

To make a long blog short, David Merkel's a great analyst. If you've never read his stuff, it's worth a gander. But I found this one lacking, not only for its off-the-mark poke at us but also how he suggested that his experience in pension funds, variable annuities and equity indexed annuities (among other things) gave him an edge.

Nothin' wrong with that experience (cough, cough)... but here's what gets me: He uses that background to try to explain why he was so far out in front of everyone else on ETNs (he gets it more than most?)... and then compares ETNs to zero-coupon bonds.

Such a tie-in makes a lot of sense. It made so much sense that I tried to write a similar analogy at another publication in 2006 as well. It didn't fly with my editors, who told me they understood institutional markets extremely well... they said it wasn't a fair comparison. I was advised never to compare notes to bonds except in the broadest of senses. Needless to say, they scuttled the copy and it never saw the light of day...

But Merkel does propose an interesting way to get around the risks ETNs pose to investors. Far be it for me to say this sounds rather convoluted, but be your own judge: "Now, what if the sponsors packaged the ETN with a default swap (written by third parties) to protect the investors if the company failed? At that level, the ETN provider should buy Treasuries or Agencies, and layer on the futures or options as the case may be, creating an ETF, because all of the advantage from doing the ETN goes away."