ETFs drop 50%...

[GRG55]

For anyone who thought that holding an ETF is the same as holding the actual commodity...

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.

[jk]

Re: ETFs drop 50%...

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.

these are etn's, i believe, whatever their name. as such, they are claims on the issuer. i think the structure of a closed end fund is different, as the fund has a legal existence of its own, and is only managed -not owned- by the issuer. [i would appreciate input from anyone who feels knowledgeable about this issue.]

[Supercilious]

Re: ETFs drop 50%...

these are etn's, i believe, whatever their name. as such, they are claims on the issuer. i think the structure of a closed end fund is different, as the fund has a legal existence of its own, and is only managed -not owned- by the issuer. [i would appreciate input from anyone who feels knowledgeable about this issue.]

Actually there is no clear difference between ETF's and ETN

Only the completely unleveraged non symmetric ETF's are still pure ETF's ... of course if they are honest and they are not doctoring the index.

Any leveraged or symmetric ETF is actually an ETN-ETF mix

Any asymmetric (pair decayed) ETN has actually an ETF component.

In any case the investor can get shafted because the issuers of ETF's and ETN's are the ones who calculate the value of their index ( because they are all black box indexes----yes it's deja vu all over again: the fox is in charge with the safety of the chicken)

I've explained all these in some detail on the oil bubble thread about a month ago

[sn1p3r]

Re: ETFs drop 50%...

The difference may be that my gld and slv ETFs are actually up 8% today rather than down 50%....

[ASH]

Re: ETFs drop 50%...

Actually there is no clear difference between ETF's and ETN

Only the completely unleveraged non symmetric ETF's are still pure ETF's ... of course if they are honest and they are not doctoring the index.

Any leveraged or symmetric ETF is actually an ETN-ETF mix

Any asymmetric (pair decayed) ETN has actually an ETF component.

In any case the investor can get shafted because the issuers of ETF's and ETN's are the ones who calculate the value of their index ( because they are all black box indexes----yes it's deja vu all over again: the fox is in charge with the safety of the chicken)

I've explained all these in some detail on the oil bubble thread about a month ago

Thanks for repeating it, as I wasn't following the oil bubble thread, and found this information very, very helpful.

[D-Mack]

Re: ETFs drop 50%...

kitco had this story up

Gold ETF gains 8% on record trading volume
By John Spence
Last update: 1:21 p.m. EDT Sept. 17, 2008
Comments: 12
BOSTON (MarketWatch) -- An exchange-traded fund tracking gold prices, SPDR Gold Shares (GLD:
85.03, +8.24, +10.7%) , was up 8% in afternoon
dealings Wednesday with investors seeking the safety of the precious metal in response to the credit problems shaking the global financial system. More than 43 million shares of the ETF, which holds gold bars in a vault, traded hands at last check Wednesday, a new all-time high. SPDR Gold Shares, launched in 2004, was also on track for the biggest one-day gain in its history.
http://www.marketwatch.com/news/story/gold-etf-gains-8-record/story.aspx?guid={FBE25F85-3DAA-4804-A812-227EB1867651}&siteid=rss

[Supercilious]

Re: ETFs drop 50%...

Duh!!!!

http://www.indexuniverse.com/blog/31....html?Itemid=3

In one of the more shocking developments of a shocking week+, it looks like Barclays PLC may let the Lehman structured products, including their Opta ETNs, default.
This is a stunner. Our publications go from frankly getting a lot of criticism of "overplaying" the credit risk issue with ETNs to dutifully reporting on what looks to be the first ETN default...in the space of, uh, less than a month. This is a shocking, shocking development and our forceful reporting of the issue was scorned in some quarters and praised in others. And if those things DO default, how real is that credit risk for you?
The amazing part of this is that it appears that Barclays PLC, who bought the Lehman Brothers investment banking and capital marketing business for a SONG (and none of the liabilities), appears willing to let all of those structured products, including the Opta ETNs be subject to the same pennies on a dollar "get in line please" treatment of the other Lehman Brothers liabilities.
Even more amazing (and embarrassing) is that we were scooped on this story by our friend Dave Hoffman of Investment News, who has been my source for this article. We did manage to cover the February 2008 launch of the Opta ETNs. But they sent us a press release on that one.

It has started ....