Are Exchange-Traded Notes Predictable? An Empirical Investigation of Commodity ETNs

Abstract

Exchange-traded notes (ETNs) are exchange-traded products similar to exchange-traded funds that track performances of some market indices. ETNs are traded throughout the trading hours on organized exchanges such as the New York Stock Exchange. In this article, the author studies a sample of ETNs issued by Barclays Bank PLC that tracks commodity futures indices. Using daily data spanning over the past 10 years up to 2018, the author investigates the relationship between premiums and returns for a sample of ETNs issued. Within a panel vector autoregression framework, the author tested several hypotheses to uncover the link between premiums and returns. The hypotheses focus on noise trading and return predictability and their impact on the informational efficiency in the ETN markets. <b>TOPICS:</b>Exchange-traded funds and applications, commodities, futures and forward contracts, performance measurement <b>Key Findings</b> ▪ There are noise traders in the ETN market. These uninformed traders surge market volume and liquidity but diminish the ability of the market to respond to new information. ▪ ETN premiums consistently and significantly predict future premiums. The results recommend that premiums might reflect some unique information about future ETN returns. ▪ The ETN market is not efficient, and tracking premiums might help investors to predict future ETN returns.