Financial advisers are glad to see that competition is heating up in the nascent exchange traded note market.
Lehman Brothers Holdings Inc. of New York stirred things up last month when it launched Opta, an exchange traded note platform, and three Opta ETNs.
Because Lehman is such a large organization, its entry into the ETN market has the potential to "draw more attention" to the investments, said James J. Holtzman, a certified financial planner and adviser with Legend Financial Advisors Inc. of Pittsburgh.
ETNs are close cousins of ex-change traded funds. However, they are debt securities backed only by the credit of the issuer; ETFs typically are registered investment companies and are collateralized by an underlying portfolio of securities.
"ETNs are so new, other advisers haven't heard about them," said Mr. Holtzman, whose firm oversees nearly $350 million in assets.
The launch of Lehman's ETN platform followed the launch of the Elements ETN platform last August.
Elements ETNs, of which there are nine, are brought to the market by a partnership that includes index providers, investment-grade issuers, distributors and securities exchanges.
Issuers include
Deutsche Bank AG and Swedish Export Credit Corp. Distributors include Merrill Lynch & Co. Inc. and
Nuveen Investments LLC.
The most successful ETN platform to date, however, has been the first: the iPath ETN platform, launched in June 2006.
There are more than $4 billion in assets among 16 iPath notes, which are issued by
Barclays Bank PLC of London and distributed by
Barclays Global Investors of San Francisco.
APPETITE FOR ALTERNATIVES
The popularity of ETNs is a reflection of advisers' growing appetite for alternative investments.
"ETNs allow you to bring a lot of alternative products to anyone," said Warun Kumar, Lehman's managing director of structured investments for the Americas.
Since ETNs are backed by the credit of the issuer, and not the components of the underlying index, they are more able to access hard-to-reach areas of the market.
For example, the Opta S&P Listed Private Equity Index Net Return ETN tracks the S&P Listed Private Equity Index, which comprises 30 global listed private-equity companies.
It's one of a very few investments that give retail investors access to
private equity, Mr. Kumar said.
The other two Opta ETNs, the Opta Lehman Brothers Commodity Index Pure Beta Total Return ETN and the Opta LBCI Pure Beta Agriculture Total Return ETN, give investors access to commodities.
Such access could prove valuable to investors, said Marvin Appel, chief executive of Appel Asset Management Corp. a Great Neck, N.Y.-based firm with $50 million in assets.
"I'm very positive about the idea of ETNs because they allow you to track indexes you wouldn't otherwise get access to," said Mr. Appel, who invests in ETNs for himself.
His praise of ETNs, however, is tempered by the perception that in some cases, the bid-ask spread — that is, the difference in price between the highest price that a buyer is willing to pay for an asset and the lowest price for which a seller is willing to sell it — is unusually wide.
While Mr. Holtzman is encouraged that Lehman is getting into the ETN game, he said, there is "overlap" between the commodities ETNs being offered by Lehman and those being offered by Barclays.
The same overlap can be seen with regard to Elements ETNs, he said.
As a result, Mr. Holtzman said, he sees no reason to add their commodities ETNs to his client portfolios.
He's perfectly happy with the performance of comparable iPath ETNs, Mr. Holtzman said.
As he does his due diligence on new ETNs, however, that could change, he admitted.
Lehman said that it believes there is an appetite out there for new ETNs, and it plans to fill it, Mr. Kumar said.
E-mail David Hoffman at [email protected].
