Dear Mr. Berko:

My broker wants me to invest in exchange-traded notes, specifically the S&P 500 BuyWrite Index and the Treasury 10-year Bear. He insists they're safe and can be very profitable.

Please tell me what the difference is between and ETNs and ETFs. And what do you think of my broker's two recommendations?

JN, Elkhart, Ind.

Dear JN:

As the market declines and as clients accumulate cash, some brokers will lie like a cheap watch to drum up payments. And your broker would probably cheat on his prostate exam if it would help him earn more commission.

Exchange-traded notes (ETNs) are one of Wall Street's most evil, complex, unproductive, economically barren investment concepts, and they were designed by coke-brained MBAs who never tasted a cherry pie. "Exchange-traded note" may sound like a soothing name, but ETNs are designed to gently pull the teats of millions of investors and milk/bilk them for hundreds of billions of dollars.

Some are called MITTS, LUNARS, BOXES, SLICKS, DUMPS, PISTONS, PEROS, STUPDS, etc., and they are as dangerous as XPLOSVS. Their investment appeal ranks somewhere between swamp gas and a near-death hallucination. They are nothing more than saturated garbage benefiting the issuer (who collects quarterly management fees) and the broker (who sells them to trusting suckers). I don't know of a single person who has made a dime with this worthless twaddle.

Exchange-traded funds (ETFs), I like, but ETNs are horses of a different color. ETFs mimic an index or group that they track by owning a representative portfolio of common stocks, preferreds, bonds, convertibles or commodities. But ETNs don't own borscht.

An ETN is an unsecured debt, an IOU issued by Goldman Sucks, Barclays, Oppenheimer, Merrill Lynch, SpankAmerica, BNP Paribus, Deutsche Bank, etc. So when you invest in an ETN, you're buying a promise from the issuer to pay you the index's return less some outrageous annual fees. And when you buy this chaff, you're hoping that the index it copies moves higher and that the issuer will redeem the note as promised.

Lots of investors got the royal shaft when Lehman went belly-up (so far none has been compensated), and lots of investors got the heebie-jeebies when Bear Stearns was taken over by JP Morgan. JP Morgan tried to negotiate a free pass on the Bear Stearns' ETN, but the SEC demanded that JPM guarantee the principal.

Stick with ETFs, which are simple, easy-to-understand investments. They pay dividends monthly or quarterly, and their values are based upon the prices of their underlying securities. ETNs, on the other hand, are unsecured debts that track various commodity indexes or unusual investment strategies, such as the inverse movement of a Treasury bond contract versus mortgage rates or the spread between the price of coal versus natural gas.

ETNs do not pay dividends or interest, but you pay taxes when you sell your ETN at a price higher than your cost. This is not to say that all ETNs are bad, but rather that they are an unnecessary and superfluous investment for 98 percent of the investing public. The iPath CBOE S&P 500 BuyWrite Index ETN (BWV-$44.66) allows you to undertake this strategy for the broad U.S. stock market. However, in the past three years, this thing lost nearly 6 percent in a strong market.

Meanwhile, the iPath U.S. Treasury 10-year Bear ETN (DTYS-$33.50) makes sense if the interest rate rises (it's down 30 percent this year), but as the recession continues to grind away, it doesn't look as if rates will go up for a while.

In sum, stay away from this brokerage-house trash, and follow the universal four-word rule of success in the stock market: Keep it simple, stupid.


Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2011 Creators Syndicate Inc.

Published: Wed, Sep 14, 2011