ETN w/ symbol “CAPE” is not available, is this by design?
Thx
We remove ETNs as best we are able. It’s by design.
Paul and staff,
I sincerely hope P123 keeps ETNs (Exchange Traded Notes) out of the ETF universe list. These debt-based instruments have very strange characteristics with contracts that seem to provide significant preference to protecting the issuer and very little accommodation for the “borrower.”
Most investors are not looking to borrow money when they purchase an investment asset as recommended by their P123 strategy. However, some don’t realize when they go to their broker’s website that they’re buying a debt instrument when they casually select that three-letter ticker that was recommended by their P123 strategy. I can see how a user could assume they’re buying an ETF because that’s the kind of portfolio they set up on P123, but they could actually be buying a debt-laden ETN with target-date termination if P123 gets lax about keeping it these cockroaches out of the mix.
The recent collapse of VIX-based ETNs (including XIV), caused by the early February market correction, is the most glaring and recent example of how ETN’s can bite you in the a** if you’re not careful.
My understanding is that P123 is trying to ETNs out of the universes, so I urge all members to notify P123 staff if you find an ETN in the list of Exchange Traded Funds (ETFs). Otherwise, we could run a system with the universe of “All ETFs” and a nasty ETN could be included, potentially wrecking things for us. Thank you!
Chris
Actually…
This prompted a discussion internally. And by discussion I mean correction.
ETNs are currently in the ETF universe, and they’re identified with
ETFFamily=ETNSThere are 131 in there right now. We identified a problem in adding new ones, like CAPE, though. We’re still examining the impact of that problem.
In any case, the way to avoid ETNs in your ETF results would be with:
ETFFamily!=ETNSWow, thank you, Paul. I guess I had received the wrong information and have been assuming they were out.
Chris
All:
Hallelujah!! You mean I can add LMLP, MORL, and CEFL to my Ports? If so, this would be a big plus.
Bill
What Chris said about ETNs is correct. But I want to add a bit of color to the topic.
ETNs are a type of “structured product,” which is a fancy way of describing a wager. Seriously, it’s an out-and-out bet. Here’s a very simple example of how this sort of thing could work.
Investment Bank A wants to borrow money. In the normal world, they might issue debt instruments with face value of $100 million, agree to pay x% per year interest and mature in 2030. But with all the super-duper high IQ geeks running around on Wall Street nowadays, why settle for something so . . . so ordinary (yuk, phooey, z-z-z-z).
A still borrows $100 million, and maybe it still matures in 2030. But when it comes to interest and maturity, they decide to get fancy. At maturity, they aren’t going to repay $100 million. Instead, they’ll pay $100 million plus or minus a percent change that matches the percent change (during the life of the notes) of the per-barrel price of West Texas Intermediate Crude Oil. And because they know so many investors want to speculate on the price of oil without having to deal with the baggage of commodity futures (leverage, rolling over of expiring contracts, etc.), they can probably issue this note with zero percent interest.
In some structured products, they might get even fancier, such as setting a floor and/or a ceiling to the maturity, or they may set maturity as 80% of the percent change in the price of oil, or they may have different variations for upside or downside. But ETNs don’t usually get that complicated. To generate broad interest in the marketplace, they’re likely to simply set the maturity as a plain-vanilla one-for-one match of the price change of WTI Crude.
So voila, we have an exchange traded instrument that looks and feels land trades like an ETF that gives investors opportunities to easily play the price of oil. That’s how ETNs got popular in the market; mainly as commodity plays. But now, they can be and are broader than that. Any kind of bet can be used in lieu of a percent change in a commodity price.
The reason why we can’t call them ETFs is because of the last abbreviation, F, for Fund. A fund means you have a proportional interest in a portfolio of something, stocks, bonds, etc. There is no counter-party risk. If iShares fails, you still own your proportionate interest in whatever securities are in the portfolio of the iShares Whatever ETF (though you may have some annoying red tape).
Because the Investment Bank A Oil Price ETN is not a fund that owns any oil price-related assets, we can’t use the F. We use N because that’s what it is, a Note issued by Investment Bank A. Here you DO have counter-party risk. If oil doubles during the time you hold the note but Investment Bank A fails because they do dumb things in some parts of the business, you wind up collecting zero or something close to that depending on how bankruptcy proceedings go. Even if the ETN is based on the S&P 500, if the issuer fails, you get zero because unlike SPY (the ETF that holds SP 500 stocks), the ETN does not represent ownership interest in any stocks. All you own is unsecured debt of the brokerage firm.
By the way, there are some ETFs that look a bit like ETNs. Consider the short and leveraged ETFs. These get to use the F because they are funds; i.e. portfolios of actual assets. But they are not really long, short, or leveraged positions in the stocks or bonds. Instead, you own portfolios that hold derivatives pegged to double the daily price gain of the SP 500 or whatever. There is no counter-party risk. You aren’t lending money to Direxion or ProShares. But you do take on risk that something gets screwy with the value of the derivatives.
I think — Chris, correct me if I’m wrong — that this is what happened with the inverse volatility things (not sure if they were ETFs or ETNs). Actually, the volatility-based derivatives performed perfectly; they did exactly what they were supposed to have done; their performance was pegged to minus 2 times the change in the VIX, or something like that. So when the VIX suddenly jumped 45% or so, the derivatives plunged more than 90%, which is exactly what they were targeted to do.
Bottom line here: If you’re going to allow fancy things into your portfolio, I suggest getting in the habit of reading prospectuses; not the whole things, just the material that describes the investment strategy, or mare particularly, that describes the “index” the security is designed to passively track, If you click on an ETF/ETN/CEF ticker on p123, you’ll go to the profile page and you should see link to the issuer’s web site. You can get the prospectuses there. (When it comes to CEFs, the trap there is how they pay dividends; they may not be pegged to income but may consist in whole, part or large part of returning capital or tapping funds that represent gains accumulated in the past — a source that has a shelf life).
Thank you, Newmilan (Marc), for your excellent description of the difference between ETFs and ETNs. Although I have not invested in any ETNs and don’t intend to, I have used an ETN (OIL) as a proxy for crude oil pricing in a somewhat decent market timing calculation. That usage abruptly ended when OIL was recently delisted along with a slew of other ETNs issued by Barklays.
I was absolutely ignorant of the unsecured debt and maturity date basis of ETNs, but now know better. My ignorance was mostly due to shying away from mutual funds and ETFs as active investments because of the management fees. If/when I attempt to build a model for ETF investing, I will definitely treat ETNs as a different animal altogether.
Paul, thanks for describing how ETNs can be identified via ETFFamily. And a general thanks to Portfolio123 for providing this level of detailed information.