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These Investment Products Look Safe. Investors Could Get Bitten.


Exchange-traded notes are wolves in sheep’s clothing. While they sound like a close relative of exchange-traded funds, which have become popular for good reason, they are very different beasts. Most retail investors should steer well clear.

British bank Barclays recently said it would take an almost $600 million hit on ETNs due to an administrative error, but more often these products are associated with losses for investors rather than for the banks that issue them. ETNs in the U.S. have burned through nearly half of the $26 billion invested in them since 2006, according to rough estimates by Ben Johnson, director of global ETF research at data provider Morningstar . Issuers argue that such calculations are deceptive, as most ETNs are used tactically by sophisticated investors to make short-term hedges or bets. Either way, the asset class is expensive, risky and complex.


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