Barclay’s Pulls The Plug on Commodity ETNs

By Lawrence G. McMillan

In a rather stunning move, Barclay’s Bank PLC, the underwriter of the iPath series of ETNs¹, announced that it is closing 21 of them. The majority of the notes set to be redeemed are derivatives-based and track commodities. Many of them carried a “Bloomberg” designation in their title. Unfortunately, many of these that are closing are the only ETPs available in the US to speculate on specific commodities, such as orange juice or cotton. In our put-call ratio positions, we have often used the options on these ETNs instead of buying commodity futures options. The largest ETN being closing is the Copper ETN (JJC), with about $71 million in assets.

Just over a year ago, Barclays had a major problem when it issued more ETNs than it had registered for. It had to halt market-making for a while (which meant that the ETN prices drifted away from Net Asset Value). Eventually, they got it straightened out, but it supposedly cost the bank quite a bit of money. The SEC fine was $361 million and the market-making losses were never disclosed. Barclays did not say there was a link between what happened last year and the closing of these ETNs, but one has to suspect there is.

The mainstream financial media is blaming this (at least partially) on a general distaste for ETNs in the US – meaning that owners of them are worried about the underwriter’s stability, I suppose. That may be related to what is going on here, for it seems to me that Barclays is trying get out in front of this and close these ETNs in an orderly fashion before something else goes wrong. Who knows that they really know? That same mainstream financial media does point out that the ETN structure in Europe is healthy and well-received, so to say that it is only the US where ETNs are in disfavor seems a bit “odd” to say the least.

Of course, they all like to point out the implosion of the XIV ETN in February of 2018, which is now called “Volmaggedon” for reasons that I cannot explain. That was a case of pure greed and ignorance or ignoring of the risk involved, and it came back to bite the holders who weren’t paying attention. That really had nothing to do with a general ETN structure, so why would that cause a general distaste for ETNs going forward?

Regardless, the Financial Times of London points out that US-listed ETNs have fallen from 221 in 2019 to 125 after this cut. Assets in these ETNs are only off about 15%, though, indicating that it is mostly smaller ETNs that have been closing. The full FT article can be found here.

Bloomberg also had an article on the matter, and it can be found here.

The ETNs that are being closed are the following. I have listed the ones that we have used in our recommendations over the year first. Only the symbol and the commodity are shown, not the full name of the ETN.

Cocoa: NIB
Coffee: JO
Copper: JJC
Cotton: BAL
Crude Oil: OIL
Sugar: SGG
Broad Commodity: BCM
GSCI Total Return: GSP
Lead: LD
Nat Gas: GAZ
Ag Index: JJA
Energy: JJE
Industrial Metals: JJM
Grains Index: JJG
Aluminum: JJU
Livestock: COW
Nickel: JJN
Softs: JJS
Precious Metals: JJP
Platinum: PGM
Tin: JJT

In some cases, there is a similar ETN, such as CANE for Sugar, which also has options.

This article was taken from the 6/16/2023 edition of The Option Strategist Newsletter. Existing subscribers can access the article here. 

¹ Exchange Traded Products (ETP’s) are either Exchange Traded Notes (ETNs) or Exchange Traded Funds (ETFs). An exchange traded fund has the actual assets of the ETF in a trust, so that there is a guarantee that if the underwriter went out of the business, the assets to cover the ETF could be distributed. SPY is an example of an ETF. ETNs on the other hand are merely notes (i.e., debt) of the issuer. In this case, Barclays was the issuer of these ETNs. If the underwriter of the ETN should go out of business, ETN holders would be in line in the bankruptcy proceedings just like any other debt holder and thus might lose a large percentage of the ETNs value.