Whenever Wall Street starts packaging a product for the masses that’s used by sophisticated investors, you know that there is big trouble ahead. There is no way that an individual investor will be able to value and understand the drivers of that investment’s value. And it’s fairly assured that Wall Street is packaging the protection to enrich itself with fees. Wall Street doesn’t have to concern itself with whether its investors build money.

This is the first thing that came to intellect when I read a Bloomberg News story Barclays Plc (NYSE: BCS) introduced a new product that put a scare into Vanguard Group Inc. and the rest of the $13 trillion U.S. mutual-fund industry. The product? An exchange-traded note (ETN). I really don’t know what it is but the story says that it allows individual investors to buy a type of forward contract linked to commodities and assets ranging from oil to currencies to foreign stock indexes. It has lower

fees than mutual funds, is less regulated and, for now, lets holders defer taxable income indefinitely.

It certain sounds great and that’s probably why the mutual fund industry is so afraid of it. But before you go out and buy one of those ETNs, compose certain you understand how its value is set and what makes that value go up and down everyday. Otherwise you could be in for a impolite awakening. Can’t figure out how to value an ETN? next I propose you hold onto your wallet with two tightly clasped fists. When Wall Street comes calling on Main Street for such complex securities.

Peter Cohan is President of Peter S. Cohan & Associates. He plus teaches management at Babson College and edits The Cohan Letter.

Original post by Peter Cohan

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