Barclays Bank PLC launched the first-ever exchange-traded notes (ETNs) in June 2006, and it recently announced that the complex now has more than $3 billion in assets. That's a fairly impressive amount for a lineup of eight products that use a new structure with which investors are not familiar and for which key tax questions still remain unanswered.
However, 70% of those assets are in one product, the iPath Dow Jones-AIG Commodity Index Total Return ETN (NYSE: DJP), and another 16% are in the iPath MSCI India Index ETN (NYSE: INP). The third-largest of the ETNs is the iPath S&P GSCI Total Return Index ETN (NYSE: GSP), which has a little less than one-tenth of the assets of DJP—roughly $212.5 million. The rest are scattered throughout the remaining five ETNs, the smallest of which is the iPath GBP/USD Exchange Rate ETN, with a little more than $10 million.
The amount invested in DJP is not surprising, really. The note tracks one of the most widely watched commodity indexes at a time when commodities are extremely hot. The DJ-AIG Commodity Index has a year-to-date total return of 10.3%. It was also one of the first ETNs launched and has had the most time to gather assets. However, GSP is based on another popular index, the S&P GSCI Commodity Index and was launched at the same time. Its assets have not grown as quickly, but that may be because investors may be looking to diversify away from oil-related commodities. The energy sector represents more than 70% of the S&P GSCI Commodity Index, and the current excitement about commodities extends far beyond oil.
INP's significant assets are also unsurprising given the difficulties of investing in India's stock market, the limited number of investment vehicles and the tremendous growth of India's economy. Its assets are currently in the area of $496 million.
A big question about ETNs, however, remains unanswered. Barclays believes the iPaths will be treated as prepaid contracts with regard to their underlying indexes by the IRS, meaning that capital gains or losses would only be recognized when the contract matures (iPaths have a 30-year maturity) or when the investor sells or redeems the ETN. Although there is a good chance that Barclays is correct, this is all speculation until an official statement is issued by the IRS. However, it also is entirely possible the IRS will not issue a ruling on the matter. Let's just say that if the IRS were to agree with Barclays, it is likely that a new wave of dollars would pour into the iPath complex of ETNs.
Written by Heather Bell