Below is a great article written by John Waggoner about exchange-traded notes.
Exchange-traded notes add another layer of risk
ETNs tied to volatility took a beating when stocks plunged
The collapse of the VelocityShares Daily Inverse VIX Short Term ETN (XIV) this week should prompt advisers to take a hard look at their clients’ holdings of exchange-traded notes.
The ETN was a bet on decreasing volatility, as measured by the Cboe VIX index. For a long time, it was a good bet: The ETN jumped 81.2% in 2016 and then roared to a 188% gain in 2017. Last Friday, the ETN closed at $115.55. Thanks to the roaring volatility since then, it is now trading at about $6.50.
That steep decline taught investors two lessons: First, something that gains 188% in a year is bound to come to earth, and sharply. Second, while ETNs can be used for difficult-to-index investments, such as commodities, they can also be particularly dangerous. Read the full article here
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