Risk

ETN Risk Explanation

Update : Oct. 29, 2012

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ETN Investment Risk

The general risks when investing in ETNs are as follows.

(1) Issuer Credit Risk

ETNs differ from ETFs in that they do not hold backing assets and are issued on the credit of their issuer financial institution. Because of this, an ETN’s price may decline or be nullified due to bankruptcy or a deterioration of financial conditions on the part of the issuer. As such, it is important for investors to take note of such credit risk.

Systematic Measures against Credit Risk

In order to reduce this type of credit risk, TSE requires ETN issuers to have a certain level of credit and has provided strict listing examination and delisting criteria regarding financial status and credit rating, etc.

Specifically, financial criteria, etc. are equivalent to TSE’s strict listing rules, such as net assets of at least JPY 500 billion, an equity capital ratio of over 8%(*), and an issuer credit rating of at least A- or its equivalent from a credit rating firm.

Also, in cases of deterioration of timely disclosure of financial conditions or financial conditions themselves, TSE has prepared a system for issuance of cautions which falls under the delisting grace period. More so, in cases where an improvement of financial conditions has not been seen, TSE will delist the issue.

Cases of issuer bankruptcy fall under the delisting criteria, and issues will be delisted in the same manner as regular listed companies. However, because holders of a certain amount of the security may request purchase or redemption, in cases where credit risk has increased, it can be limited through the exercise of such request rights.

  • (*)In the case of securities companies an equity capital ratio of over 200% is required. For insurance companies, a solvency margin of over 400% is required.

(2) Price Fluctuation Risk

Fluctuations in the Underlying Indicator

  • The underlying stock price index, etc. may experience a decline in price do to various economic conditions. As a result, the price of the ETN may decrease to a level lower than that of the principal.

Disparity with Market Price

  • Because an ETN issuer guarantees the redemption value per note (equivalent to the ETF base value) will track the underlying indicator, there are no tracking errors excluding processing fees.
  • However, because the price of the ETN will fluctuate according to market supply and demand, please note that there may be cases where the redemption value per note differs from the market price movements of the ETN.

(3) Liquidity Risk

In cases of low order volume, trading of the ETN may not be possible at the expected price due to market conditions such as stock price index.

(4) Other Risks

  • JDRs are eligible for listing. However, because the trust assets of such ETNs are securities issued overseas, losses may be incurred due to exchange rates. Additionally, changes in the political/economic situation in the home country/region, changes in taxation, and natural disasters may cause losses to be incurred from redemption value fluctuations which go below the value of the principal.
  • Issues may be delisted according to TSE delisting criteria.
  • In cases where continuation of the trust is deemed difficult by the trustee, the trust may be concluded.

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