Exchange-traded notes or Exchange-traded nightmares?

I’m back in the USA and the blog is late because of the pileup of business during my absence.

There are scary new entities coming in the exchange traded products market, among others from Barclays which today launched a range of British exchange-traded notes, having sold its iShares USA exchange traded funds division to BlackRock last year.

The new British dingbats are unsecured debt instructments underwritten by the issuer and traded on the London Exchange. The new ETNs will give people the ability to track indexes for commodities and volatility. BARC will be the sole counterparty.

Yesterday’s Financial Times (UK edition; not US) quoted Deborah Fuhr, global head of research at BlackRock, warning about “a lack of clarity” in the new notes. Perhaps because her firm now owns the old Barclays business, she points out: “they are not ringfenced, not held by custodians, and if the issuer goes bust, then people lose money.” Post-BlackRock, Barclays has $6.5 bn under management in ETNs, not exactly big money compared to the $85 bn in the US market for ETFs.

The new notes add even more counterparty risk than what we are used to in US ETFs.

While your editor was in Europe, somebody pulled the plug on Yahoo! Finance publishing the net asset values of high-volume US listed ETFs. This makes it harder for retail investors like us to arbitrage between comparable ETFs the way the institutions do. ETFs are big advertisers on financial websites.

By prospectus, institutional investors are authorized to trade in blocks of $50,000 to $100,000 – either by buying the underlying asset on behalf of the ETF when the ETF price is too low or, by shorting the ETF and buying the underlying asset when the ETF is overpriced. The institutions do not intervene unless the gap between the NAV and the price is big enough. So by not publishing the information, Yahoo! keeps retail investors from benefitting from it.

However, it is likely that the arbitrage desks of many Wall Street firms do have the ability to calculate the NAV of ETFs and make money by trading on the spread without any interference from mere retail investors.

More for paid subscribers follows starting with news from Japan, Mexico, and Switzerland from our reporters on the spot. Join them.