HSBC ups commodity Elements to $37 million; ETN demand slow but concept not dead, sources say

By Kenneth Lim

Boston, March 24 - Exchange-traded notes continue to remain under pressure in the markets amid ongoing concerns about the creditworthiness of issuers, market sources said.

But the platform remains promising, and investors will probably revisit the exchange-traded format when the markets settle, the sources said.

The ETN space had some positive news Tuesday, with HSBC USA Inc. registering an additional $4 million of Elements exchange-traded notes due June 16, 2023 linked to the S&P Commodity Trends Indicator - Total Return index.

The new notes will bring to $37 million the amount that has been sold for the particular product.

The ETN trades under the symbol "LSC" on NYSE Arca.

Asset-based outcomes

ETN volumes have been flat or negative across the board, but some types of ETNs have done better than others, one sellside source said.

"Some of the commodity ETNs have maintained assets," the source said. "Equity-based ETNs have seen a lot of outflows. They're discontinuing some of the equity-based ETNs."

This year, Credit Suisse also added about $4 million of new notes to its Elements ETNs linked to the MLCX Livestock Total Return index. Those ETNs trade under the symbol "LSO" on NYSE Arca.

The open Elements ETN platform is marketed through Merrill Lynch.

A structurer said the ETN's struggles are not unique.

"Every structured product and almost every investment instrument and asset class has been affected," the structurer said.

"The concerns about ETNs that have affected demand for those investments are the same as any other kind of senior unsecured notes, namely people are worried about the credit quality of the issuers. The reason this is a little more apparent in ETNs than maybe some other products is holders can redeem their notes, so you see the impact a little more."

Indeed, at the Structured Products Association annual conference in New York on Monday, Claymore Investments managing director of product development David Cohen noted that the issuers' credit risk was the main hurdle to his firm's embracing of the ETN platform.

Resilience expected

But issuers expect that ETNs will bounce back.

"When people stop worrying about issuer risk, they'll start buying ETNs again," the structurer said.

"The benefits of an ETN, the potentially advantageous tax treatment, the reduction of tracking error, the access to certain asset classes, these benefits haven't changed. It's just in this day and age that the concern about the issuer's credit quality is big enough to outweigh those benefits.

"If you're comfortable with buying a non-exchange traded structured note, there's no reason why you shouldn't also be comfortable with an ETN."

Until the markets recover, however, new ETN issuance will likely be slow, the structurer said.

"Because of the exchange-traded nature of the product, we need to see enough demand for the product to print it," the structurer said.

"Otherwise it's not worth it. But there's still a need for the ETN wrapper in the investment spectrum, it can play a role in portfolios, and we think it's not going to go away."

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