ETF Update: Nervous ETN Investors, September ETF Performance

Nervous ETN Investors

Market volatility and the precariousness of our financial institutions are making some ETN investors a little nervous.

The recent failure of Lehman Brothers has highlighted the risks of ETNs, which are credit instruments. And even when salvation for a firm that has gone bust arrives, there’s no guarantee - as the in case of the Barclays-Lehman deal. Barclays has said it won’t be assuming the the obligation of Lehman’s line of ETNs.

As a result, ETF expert Debbie Fuhr says that many investors are shying away from them in favor of funds that have a fiduciary responsibility. Fuhr now works as an ETF analyst at Barclays.

Evidence of the move away from ETNs toward funds with a structure that is more tangible came when counter-party fears were fresh during the Lehman/American International Group (AIG) meltdown. The level of flows into traditional ETFs went up and questions began to flood in regarding the future of the Opta-Lehman line of ETNs and the assets involved in them, reports Rob Mackinlay for InvEstigate.

This is also evidence of how much investors are in need of education and how important it is to analyze trends and new products before jumping in. The recent activity in the markets also underscores the importance of understanding the risks of certain products.

Paul Amery for Index Universe says he doesn’t see how the ETN market can regain the confidence of investors and recover from the shock of recent weeks. We’re in for some interesting times ahead.

September ETF Performance

September most volatile months and quarters for ETFs in stock market history. Several of the country’s largest financial institutions failed, some others merged and others were acquired by the government.

There were a number of days that had both gains and losses in the hundreds of points, including yesterday, in which the Dow Jones Industrial Average plummeted nearly 800 points. It was the biggest one-day point loss ever for the index. The Dow ended the month down 6% and the quarter down 4.7%. The S&P 500 lost 9.2% for the month and 9.4% for the quarter. Click here to see our ETF performance report to see how different asset classes, sectors and global regions performed for the quarter.

This is also the quarter in which oil began its long descent. Oil closed the second quarter at $140 a barrel. While it rose on the final day of trading for the third quarter to settle at $100.64, it’s still a loss of 28.1%. In fact, the PowerShares DB Crude Oil Double Short ETN (DTO) was one of the quarter’s strongest funds, gaining 77.6%.

For the month of September, the top fund was the KBW Regional Banking (KRE). It seems a little counter-intuitive, but regional banks have largely managed to dodge the troubles that have plagued the larger financial institutions. The fund rose 11.7% this month. It was also the top fund for the quarter, gaining 33.2% over the last three months.

Metals and mining was the hardest-hit sector, with the SPDR S&P Metals and Mining (XME) losing 34.6% for September.

Russia took a big hit in the third quarter, as Market Vectors Russia (RSX) fell 45.3%. The fund is 50.9% off its high, which was hit on May 19.

Comments

[Oneslip:]

ETN's are only as strong as the institution backing them. Barclays has several ETN's but Barclays is in good financial shape so I feel confident recommending those.

2008 Oct 02 08:47 AM