ETNs: Mostly Harmless
Exchange traded notes (ETNs), which are unsecured debt securities, are back in the headlines with the banking crisis, since UBS Group’s takeover of Credit Suisse poses questions for what this means for Credit Suisse’s ETNs.
Should investors be concerned about these Credit Suisse ETNs? According to Nadig, not really. Everything in the unwind to UBS suggests that the senior debt that these ETNs represent “is going to be just fine.”
“The only reason I would be concerned is if you don’t want to have timing exercised against you. I think there’s very little chance that you get wiped,” Nadig said, adding that “it’s much more likely that UBS calls these notes and therefore you just basically get your cash handed back to you at a fair value.”
“That’s a fine outcome. You get to do that without transaction costs if you just want to wait,” he said before adding that “if for some reason you care about when you’re going to sell those things, you might want to do that on your own time.”
As for why UBS would call these ETNs, Nadig said it’s “just hair.”
“These things effectively have to be repapered as UBS debt at some point in this process. I don’t think they’re going to bother doing that,” he said.
Since UBS has its own extensive ETN division with ETRACS, Nadig said that “it doesn’t seem that likely that they would want to hang on to this.”
“I suspect whoever’s in charge of doing this merger is going to see this as nothing but more hair in the derivatives book, and they’re going to want to clean that up as fast as possible,” Nadig said. “So, I would be a little surprised if they tried to extend these products’ lifetimes, remarket them, [and] rebrand them.”
Nadig thinks it will be “much more likely to see them just close down.”
He clarified, however, that he doesn’t find anything “inherently evil” about the structure of ETNs. In fact, they have some nice features. For one thing, they can promise any pattern of return, and the bank is forced to deliver it. Plus, they get taxed as prepaid forward contracts as long as they don’t provide currency returns.
But ultimately, they’re harmless.
“I don’t think there’s any point in shutting them down. Nobody’s getting hurt by these things,” Nadig said. “So, I’m fine that they continue to exist. I don’t think it’s worth bothering to regulate them out of existence.”
A Banking Crisis Tailwind
The banking crisis could be a huge tailwind for short-term cash management ETFs like the JPMorgan Ultra-Short Income ETF (JPST ) or the PIMCO Enhanced Short Maturity Active ETF (MINT ). Roughly $20 billion has gone into short-term treasury ETFs this year, with seven of the top 20 ETFs measured by inflows being treasury related.
“I definitely expect you will see continued flows into that sort of that short, middle part of the curve,” Nadig said. “And what that means, obviously, is people will big those things up, which means yields will come down.”
He doesn’t think so much money is going to flood the short end of the curve we’ll suddenly return to a normalized curve. “I think we have a ways to go before we get there,” he said. “But there’s no question we’re going to see the short end of the Treasury curve played around with by investors managing their cash.”
The Return of Crypto?
While banks have been facing turmoil, cryptocurrency has been doing well, with Bitcoin up nearly 65% year-to-date.
“What we’ve seen since this mini banking crisis is the reversion to the narrative of bitcoin being the counter-systemic asset,” Nadig said. “It’s actually really good that this is happening after tis crypto winter we had.”
“I like the fact that we flushed a little bit of the hype out of the market before we had this test case of the safety scenario for bitcoin,” he added.
While there’s this crackdown on cryptocurrency coming from U.S. regulators (“which I am absolutely not a fan of,” Nadig pointed out), bitcoin seems “have some sort of regulatory halo,” that’s protecting the currency from scrutiny.
“Nobody seems to be coming after bitcoin directly the way they’re going after Binance and FTX,” Nadig said, adding that this is “shaking some folks both out of the fringes of crypto and back into bitcoin as well.”
Regarding the recent SEC crackdown on cryptocurrency, while Nadig has “been a fan of early and proactive regulation,” he said that “we as a country are doing precisely the wrong thing.”
While coming in much sooner “would have been the key to making the U.S. the center of innovation in this space,” Nadig said: “I think that ship has sailed.”
According to Nadig, if you look at there the new and interesting crypto projects are popping up, they’re not in the U.S. In fact, the U.S. is now on a list of countries that includes Iran, Syria, and North Korea that can’t participate in new crypto projects.
“That’s terrible,” Nadig said.
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