Deutsche Bank squeezes out investors in exchange traded notes Delisting Thursday will leave remaining holders stranded and potentially facing steep losses By Asjylyn Loder Updated: April 10, 2019 7:13 a.m. GMT A dozen Deutsche Bank exchange traded notes will soon join the ranks of the living dead, leaving investors in an unusual quandary. The bank plans to delist the products from the New York Stock Exchange’s Arca trading platform after markets close on Thursday, consigning them to a hinterland of illiquid over-the-counter trading. Investors who do not get out in time may find themselves stranded in an orphaned product that is tough to sell at a fair price, said Dave Nadig, managing director of ETF.com, an industry publication owned by Cboe Global Markets. “You’re not going to be able to unload these except at a steep discount,” he said. Deutsche Bank declined to comment. Exchange traded notes share some of the characteristics of exchange traded funds, a fast-growing $3.8tn market. Both trade on exchanges and track the price of stocks, bonds, commodities or derivatives. There are 171 ETNs in the US market with about $21bn in assets, according to FactSet. But there is one major difference: While ETFs own the underlying assets, such as baskets of US equities or natural gas futures, ETNs are debt issued by a bank, similar to a corporate bond. That difference makes some ETNs difficult to kill. Like corporate bonds, some ETNs cannot be dissolved until they mature, often 20 to 30 years after they were issued. Banks cannot force investors to liquidate, and some notes languish on the market for years. For tax reasons, the structure is often favored for complex strategies that invest in futures contracts or other derivatives, or that use leverage to amplify gains and losses. More than half of ETNs invest in commodities or other alternative assets, and almost half allow investors to place leveraged or short bets on the market, according to FactSet. Most of the Deutsche ETNs in question are a decade old, holdovers from the bank’s early foray into exchange traded products pegged to prices of oil, metals and other commodities. Most of the soon-to-be-delisted notes are relatively small — with only $76.8m in combined assets — and do not mature until 2038. Importantly, like many early ETNs, they lack provisions that would allow the bank to close them early. Instead, they are being slowly starved. The bank stopped allowing the creation of new units of the ETNs in 2016, crippling the mechanism that balances supply of the notes and keeps prices in line with the assets they are meant to track. ETNs, like ETFs, operate like open-end funds, and the number of units fluctuates based on supply and demand. This creates additional risks for investors. When new issuance is closed, ETNs trade more like a closed-end fund and can trade at a substantial premium to the value of the assets. In January 2016, an oil ETN issued by Barclays was temporarily closed to new issuance and the price jumped to a 48% premium over the value of oil futures. Then Barclays put out an alert about the problem and the price collapsed. Newer ETNs typically include caveats that permit the banks to call the notes early, essentially shutting them down. Last year, Barclays shuttered and delisted 50 iPath ETNs, replacing some of them with near-identical callable “Series B” notes. Barclays gives investors who stuck with the delisted products the option to redeem directly with the bank at net asset value, even if all they own is one share. Otherwise, they can try to sell on the over-the-counter market, probably at a steep discount. Another example is the popular iPath S&P 500 VIX Short-Term Futures ETN, which matured in January after a decade on the market. It was the first exchange-traded product that allowed investors to bet on the Cboe Volatility Index, better known as Wall Street’s fear gauge. These liquidation triggers can sometimes come as a rude awakening to investors who do not read the fine print. But delisting is often the only way out for banks that want to exit uncallable ETNs. Because the notes are bank-backed debt, unwanted ETN businesses can be practically impossible to sell to another company. Deutsche transferred 11 of its legacy ETFs to Invesco in 2014 but retained the notes, which never became part of the bank’s newer Xtrackers ETF lineup.