The Danger of ETN’s (VXX VQT)

By Lawrence G. McMillan

One should be aware of a potential problem in these ETN’s.  I am not referring to the “net asset value” problem that engulfed the “Double VIX” (TVIX) a couple of weeks ago.  Rather, I am referring to the fact that an ETN is a credit obligation of the issuer (Barclays, in the case of VXX, VQT, and many others).  An ETF, on the other hand, is collateralized by placing underlying securities on deposit.  For example, SPY is the S&P 500, and shares of SPY are created by depositing the S&P 500 stocks in trust.  Therefore, there is no risk to the holder of SPY.  If the ETF ever needed to be dissolved, the underlying securities are there.

But if Barclay’s Bank should go bankrupt, the holders of the ETN’s would just be another creditor in the bankruptcy, trying to get back cents on the dollar for their holdings.  Barclay’s recently reported earnings of $833 million for the quarter.  That’s down a lot, because it is a European bank, but it’s still a big profit.

Even so, there is a risk (probably very, very small), and you should be aware of that risk if you are planning to hold these ETN’s for any length of time. ■

This article was taken from the most recent edition of The Option Strategist Newsletter.