Prospect and Conclusion
As a new product, ETN has a very short history. However, it has been growing very rapidly. The ETN represents a nifty product structure that is gaining respect and funding in the market. By 18 July 2006, just one month after the launch of first two ETNs, GSP and DJP, GSP had attracted more than $40 million in assets, and DJP had pulled in more than $130 million for Barclays. Investments in iPath ETNs surpassed $2 billion by late April 2007. In just over a year Barclays has gathered close to $3 billion in eight funds. Encouraged by the good performance of the ETNs launched by Barclays, other financial institutions have either launched their own products or are drawing plans to partake of the ETN space. We believe more ETNs will be launched to raise more equity for financial institutions. For the customers, the advantages such as tax-efficiency and good liquidity of ETNs will attract more investors to this innovative structured product. All of these imply that ETN is becoming more and more popular.
However, now the question is whether this trend is going to last long. Several industry gurus point to factors that may well dampen the initial euphoria surrounding this product of financial engineering. The lack of historical record – upon which to base their decision to make ETN a part of their portfolio or not – could be keep potential investors at bay. More importantly, the issuing banks advertise tax-efficiency as ETNs USP. If the IRS rules in the issuers’ favor, the implications of which have been discussed at length in Chapter 3, ETN sales could explode. But what if the IRS delivers an unfavorable word-or never rules? A line of thought that is doing rounds is that even if the IRS delivers an unfavorable word-or never rules at all-the ETNs could still be enormously successful. The reason is that ETNs provide efficient access to segments of the market that would otherwise be difficult for retail investors to reach. But how could we expect that the investors would still prefer ETNs to ETFs, or any of the multitudes of other structured products out in the market, if there is no tax-efficiency for ETNs. Drawing a comparison to ETFs, another structured product, which suffers from only market risk, ETNs face both counter party risk and market risk. ETNs, bereft of their tax advantage, may lose their shine in the eyes of an entire class of investors.
To conclude, ETNs have performed very well so far as a new kind of structured product with lower fees, better liquidity and tax-efficiency. However, both financial institutes and investors should keep an eye on the status of the tax opinion from the IRS on ETNs while seeking ETNs as business or investment possibilities.
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