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Just How 'Safe' is that ETF or ETN? /



September 23, 2008 – Comments (4)

ETF Securities products plummet up to 50% on AIG fear (Link)

ETF Securities products plummet up to 50% on AIG fear
By Rob Mackinlay

Shares in ETF Securities products, which are backed by AIG, were down as much as 50% this morning after US insurer was downgraded by credit agencies S&P and Moody’s.

ETFS Precious Metals dropped 50.68%, ETFS All Commodities dropped 54.7%.

On its website ETF Securities says it has assets of $7.65bn under management in exchange traded commodities. These products track commodity prices using financial instruments mainly provided by AIG-FP which are backed by AIG.

This morning ETF Securities issued a statement saying that AIG was continuing to honour its obligations. However it warned that AIG faced the risk of further downgrades and said: “A number of firms who were making markets in the Commodity Securities stopped doing so yesterday afternoon.”

The note said: "The ETFS group is actively working on possible ways of providing investors with liquidity."

One of the Frequently Asked Questions on the ETF Securities website is: “What is the credit risk for investors?" The reply is: “ETFS Oil Securities and ETFS Commodity Securities are backed by commodity contracts purchased from AA-rated third parties. Currently, these third parties are Shell and AIG.”

In its prospectus, ETF Securities says that it is through "equivalent Commodity Contracts" with these counterparties that "the Issuer will seek to assure itself of having funds available to meet liabilities to Security Holders upon redemption."

The prospectus says: "The payment obligations of AIG-FP (but not of any other Commodity Contract Counterparty) are guaranteed to the Issuer by AIG in the AIG Guarantee."

In its prospectus, under the heading "AIG-FP and AIG Credit Risk and Default" ETF Securities says that the value of its products could be affected by a credit-rating downgrade, saying this "could cause Commodity Securities to trade at a discount to the Price".

The prospectus says that issuers of ETF Securities products are only able to seek other contract counterparties if AIG-FP fails to provide an alternative itself. It says the issuer is "only able to create Commodity Contracts with any other Commodity Contract Counterparty if... an AIG Downgrade occurs and AIG-FP has not provided certain alternative credit support in accordance with the conditions of the Facility Agreement."

If the issuer of an exchange traded note goes bankrupt, investors holding exchange traded products backed by these notes will join the ranks of other creditors hoping to get their money back.

Investegate made a number of calls to ETF Securities yesterday but no one was available for comment. 


Barclays said to steer clear of Lehman ETNs 

Credit storm threatens ETFs and ETNs
MarketWatch - Sep 18, 2008
The credit turmoil and sell-off in financial stocks has spilled over into exchange-traded funds and notes. 

PartnerRe Estimates Lehman Losses at $110 Million
Insurance Journal, CA - Sep 17, 2008
Bermuda-based PartnerRe Ltd. announced it held $110 million face value of fixed income securities issued by Lehman Brothers Holdings Inc.  "I am burning my finance textbooks as we speak. Where can I find some good central planning books?"

Some good quotes I've heard the past few days...

"We have four boxes with which to defend our freedom: the soap box, the ballot box, the jury box, and the cartridge box."Sen. Larry McDonald

"the only question i have with all this is...

who are the 19% of people who actually approve of congress' job nowadays?" - DemonDoug


4 Comments – Post Your Own

#1) On September 23, 2008 at 12:25 AM, AnomaLee (28.90) wrote:

As if you don't have enough to worry about. 

Anyway, if you have an ETF or ETN that relies on derivatives then I'd strongly advise researching what parties are backing your investment and act accordingly.

About a month ago I purchased a few hundred shares of DGP until I discovered that it was managed by Deutche Bank and retained no underlying value as an ETN so I sold the position.

Would I thumb it up in CAPs again? Yes...
Would I feel comfortable being trapped holding that position with my own money? No...

Many ETFs that use leverage and inverse instruments are highly sensitive to the ongoing financial turmoil.

If the government bailout doesn't go according to plan and is trapped in purgatory AKA Congress then I would be even more concerned about just who IS backing my investment...

Just something to think about...

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#2) On September 23, 2008 at 12:32 AM, AnomaLee (28.90) wrote:

Also, if you have not done so already...

I urge you to take the time and please visit

I wish I had access to this information 4 years ago. You will learn everything you should know already... 

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#3) On September 23, 2008 at 1:52 AM, Tastylunch (28.52) wrote:

Holy Hell

I forgot about that nature about ETFs. 

 That is very importnat advice, Anoma. I wish I had more than one rec to give.


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#4) On September 23, 2008 at 8:39 AM, EverydayInvestor (< 20) wrote:

Of course, stock and bond ETFs are safe (except for the double long/double short ones) because they own plain-vanilla stocks or bonds.

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