ETFs’ Troubled Cousins Bid For New Investors

etnBackers of exchange-traded notes are hoping financial markets settle down enough for investors to see the investment’s advantages rather than just its credit-related risks.

Before the credit crunch, ETNs were sometimes lumped with their more popular cousins, exchange-traded funds, or ETFs. Although structured differently, both generally follow indexes and trade on exchanges like stocks.

However, the banking crisis that claimed Lehman Brothers and Bear Stearns put ETNs in an unflattering light.

ETNs are debt instruments issued by banks, rather than a share in a portfolio, as an ETF is structured. This key difference became clear when credit markets seized up and banks stopped lending to each other.

ETNs have suffered like most mutual funds from the collapse in asset prices, but some observers wonder if their reputation has been irreparably damaged by the credit turmoil, as Bear Stearns and Lehman both offered ETNs.

   Down But Not Out
 “Are ETNs dead? No,” said Scott Burns, Morningstar Inc.’s director of ETF analysis. “Are they wounded? Yes.”

Total assets in U.S.-listed ETNs stood at $5.8 billion recently, or about 10% of the size of the ETF business, according to Financial Research Corp.

Full Story: http://online.wsj.com/article/BT-CO-20090608-705504.html

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