El-Asmar: There's been tremendous growth in the last two years in the exchange-traded note space. The first one was launched in June of 2006, and today you have about 58 separate ETNs and close to $6.2 billion in assets. I think that that is going to continue and you're going to see more ETNs in terms of numbers as well as in terms of additional ETN platform providers coming to the market. So you're going to see both of these trends happening in the next few months.

IU: Do you see them following a similar trajectory as ETFs?

El-Asmar: I think if you just looked at the first two years of existence of ETFs, probably ETNs have grown faster just year-over-year. We're living in a different environment as well, so that's maybe not a good comparison in absolute terms. But, yes, the trajectory is substantially faster than the trajectory or the growth in the exchange-traded fund space. When the first $1 billion mark was met, or the $2 billion or the $5 billion was met, the ETN space was growing much faster than when the first $1 billion was met in ETFs and the second billion or fifth billion.

IU: Where do you see the industry, in about a year? What about five years out?

El-Asmar: Today it's about $5.5 billion, and that's after less than two years of existence. In three-to-five years' time a good number for the industry could be $30 billion to $50 billion. It could be much bigger than that if there continues to be a demand for new asset classes. In particular, I think the big themes are going to be around alternative investments and algorithmic strategies and possibly active exchange-traded products.

IU: Is there a typical ETN investor?

El-Asmar: We've actually looked at that, and we have a broad set of investors. It actually depends on the ETNs. In some ETNs you have asset managers like mutual funds, you also have hedge funds, you have endowments, foundations, RIAs, banks, private banks, etc. It's a good mixture.

The typical investor is more of an asset allocator or a trader, somebody looking to allocate a certain part of a portfolio in a simple, transparent and cost-efficient way with the ease of trading on the exchange or the liquidity of the exchange. The other type of ETN purchaser or seller is more of an active trader, who basically wants to hedge an overall portfolio and to do that with a very easy-to-trade instrument.

IU: Could something like the Bear Stearns fiasco have an effect on how ETNs are viewed by investors?

El-Asmar: In the case of Bear Stearns, the primary concern of investors was the creditworthiness of Bear Stearns and that the window of redemption was a one-week window, so basically people had to wait until the Thursday after what happened on Friday and Monday without having the peace of mind of being able to exit. I think that shows the importance of the credit rating of the issuer, the fact that there is a credit risk involved in ETNs and its effect and that investors should be aware that they are having a trade-off between credit risk and tracking error. That's a trade-off between ETNs and ETFs. Also, there are some ETNs that are superior to others because some ETNs offer overnight liquidity versus weekly liquidity. When we created the ETNs back in June of 2006, we were offering only weekly redemption windows, but now we offer them on a daily frequency. Many of the other ETN providers have followed suit, but many still have weekly redemption features.

IU: Why do so many ETNs track the commodities market?

1 | 2 | 3 |