From the December/January 2013 issue of Futures Magazine • Subscribe!

ETNs are made for spreads

Market match

ETNs based on commodity futures tend to move in price at the same pace as their associated futures contracts. The result is that the percentage price spread forecast for the underlying at expiration also indicates the span of higher and lower prices expected for the ETN between the current time and expiration. In this way, the options market is forecasting a continuous stream of future price spreads for ETNs. As the underlying contracts expire and are replaced by new farther-out expirations, the forecast can be extended throughout the life or planned holding period of the ETN.

At this time, there are many ETNs and exchange-traded funds (ETFs) available with ETNs based on indexes of commodity and futures prices representing unsecured debt of the issuing institution. ETFs differ from ETNs in that they represent ownership of shares in real assets instead of index prices. 

To illustrate the depth of securities now available for trading on stock exchanges, website goldetf.net lists four long gold ETNs, including the ETN used in this study, E-TRACS UBS Bloomberg CMCI Gold ETN. There also are double-long gold ETNs and double-short gold ETNs, each seeking to double the investment returns of the Deutsche Bank Liquid Commodity Index: Optimum Yield Gold. (Leveraged funds require extra care particularly in gold, but options and futures traders understand the risk in leverage.) The seventh security listed by goldetf.net is the Power Shares DB Gold Short ETN.

The silver ETN used here is E-TRACS UBS Bloomberg CMCI Silver ETN. Wheat and corn ETN data are listed by Bloomberg for WHEU and CONU. Along with gold, silver, wheat and corn ETN prices from Bloomberg, futures prices are found at Barchart.com. Analytical methods described should be applicable to any ETN or ETF whose price index is based on a single underlying asset.

Paul Cretien is an investment analyst and financial case writer. His email is PaulDCretien@aol.com. 

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