Last February Lehman introduced several exchange-traded notes (ETNs) under the “Opta” brand name. Unlike exchange-traded funds (ETFs), which represent actual share holdings, ETNs are backed by the credit of the issuing bank. That didn’t seem like a big deal a few months ago, but it does today. The Lehman ETNs no longer exist.

Morgan Stanley has four currency ETNs. This firm moved to traditional banking status allowing them to more easily borrow from the Fed in an emergency, but the risk of default remains.

Barclay’s is a big player in ETNs and they are the most financially strong, but in today’s climate that can change fast. AIG was considered in good standing just two weeks before their failure.
The ETN market is much smaller than the ETF market. With today’s credit crunch, the ETN market may get smaller still. I see no reason to subject portfolios to the credit risk of ETNs.

David Vomund
http://www.etfportfolios.net/