A Barclays Plc exchange-traded note (“ETN”) that traded more than 130% above the value of the natural-gas index to which it is linked, lost 42% of the premium in only 3 days. The iPath Dow Jones-UBS Natural Gas Total Return Sub-Index ETN, which traded in excess of a 100% premium for nearly three weeks beginning March 5, began dropping on March 20, the day after its price ascended to 134% more than its affiliated index.

ETNs are unsecured bank debt backed by their issuer’s credit. By contrast, exchange-traded funds actually hold assets. Banks issue and redeem ETN shares based on the demand level for the securities. That demand typically does not affect the price, since the ETNs are supposed to track the performance of an index. But, as shown by the Barclays ETN, exchange-traded products sometimes become unhinged from their target index, resulting in large spikes or drops, which can be devastating to investors.

Unfortunately, more and more of these highly complex, high-risk exchange-traded products are being sold in an unsuitable manner to retail investors, who typically will not fully appreciate the risk of loss. Moreover, many brokers do not understand the products and misrepresent them to investors.

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