Deutsche Bank will redeem all shares of a leveraged, exchange-traded note (ETN) on or about September 9th at a price to be determined on that date. The ETNs, PowerShares DB Crude Oil Double Long Exchange Traded Notes have traded on the New York Stock Exchange under the symbol DXO and the Toronto Stock Exchange as DOU.
Deutsche Bank, which “manages the exposure of” the ETNs, said the fund has experienced a “regulatory event,” according to a Sept. 1 announcement. “Daily creations of DXO will remain suspended. Daily repurchases at the option of investors will be accepted in the normal manner up to and including September 9.”*
The Deutsche Bank announcement included this note: “* As disclosed in the pricing supplement relating to the Notes under the heading “Risk Factors – The market value of the securities may be influenced by many unpredictable factors,” the market value of the Notes may be influenced by, among other things, the levels of supply and demand for the Notes. It is possible that the suspensions, as described above, may influence the market value of the Notes. Deutsche Bank believes that the limitations on issuance and sale implemented may cause an imbalance of supply and demand in the secondary market for the Notes, which may cause the Notes to trade at a premium or discount in relation to their indicative value. Therefore, any purchase of Notes in the secondary market may be at a purchase price significantly different from their indicative value.”
Exchange-traded notes differ from exchange-traded funds (ETFs) in an important way. Owning an ETF is akin to owning shares of a basket of securities–the ETF owns the underlying assets–as in a closed-end fund. The difference with exchange-traded notes is that the issuer of the ETN–not the ETN itself–is the owner of the underlying securities. The ETN buyer gets the promise–the note–that is based on the underlying assets–but the ETN does not directly own the underlying assets–the issuer does. The ETN buyer is once-removed from owning the ETN’s underlying securities, so the creditworthiness of the issuing company is important in the case of ETNs.
Regulators on alert
The Securities and Exchange Commission (SEC), and Financial Industry Regulatory Authority (FINRA), recently cautioned investors about owning leveraged ETFs, and investment advisors and brokers about recommending or selling leveraged ETFs and ETNs. The PowerShares DB Crude Oil Double Long Exchange Traded Notes are leveraged, exposing the investor to potentially larger swings on the upside and downside as the oil markets move.
Comments? Please send them to [email protected]. Kate McBride is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.