The Lyxor gold ETN's structure is not directly comparable to ETF Securities' physical gold trackers—ETFS Physical Gold and Gold Bullion Securities—since the two ETCs are backed by allocated gold bars, held with a custodian, whereas Lyxor's ETN is collateralised by government bonds, with a parent bank guarantee on top.  

The gold-backed ETCs are cheaper than Lyxor's ETN on an all-in basis (carrying annual total expense ratios of around 40 basis points) and are backed by bullion itself, rather than by bonds or funds.  Lyxor is less expensive when only comparing only the fixed fees (30 basis points for the Lyxor ETN versus 39 and 40 basis points, respectively, for the ETCs).

Lyxor has admitted that it is targeting those categories of investor that may prefer the ETN for regulatory or tax reasons, or to diversify issuer exposure. 

When Lyxor adds other commodity trackers to its range, competing more directly with the AIG-backed Commodity Securities range of ETCs, investors will need to assess Lyxor's use of full collateralisation, using a Luxembourg-based issuer and a parent bank (Société Générale) guarantee on the exposure, and compare it to ETF Securities' structure, which involves the pledge of securities by AIG Financial Products to the account of the intermediary bank, BoNY Mellon in New York, to back the performance of the ETCs. The collateral provided by AIG is subject to certain "haircuts", and ETFS points out that it has the right to issue a "Notice of Exclusive Control" to BoNY Mellon in the case of an AIG default, effectively freezing the collateral account and allowing it to liquidate the assets.

For a non-institutional investor, or for those without access to specialist legal advice in securities and bankruptcy law, the comparison between these two firms' products, and those of other, similar trackers seems a complex task. On Lyxor's ETN website, for example, in the "product comparison" section, the firm suggests that, when comparing the ETNs to other exchange-traded products, "counterparty risk must be assessed and depends on the signature quality of the issuer or of the guarantor, if any. If collateral is in place, the quality of such collateral must be analysed, along with the related covenants." ETFS argues that it is independent from any guarantor and is in a position to ensure security holders' best interests, and an orderly wind-down of its products in the case of a default.

IndexUniverse.eu approached lawyers specialising in European regulatory and securities finance at London-based firms Clifford Chance and Freshfields to seek their views on the relative merits of the two types of structure, but neither firm was prepared to comment.

As far as collateral disclosure goes, the Lyxor ETN Long Gold prospectus reveals that Lyxor is currently using the Lyxor ETF EuroMTS 15+Y fund, which carries an AAA "fund" rating from S&P. ETF Securities' physical metal ETCs are backed by allocated bullion, as was described earlier. For the ETCs in its Commodity Securities range, ETF Securities currently does not reveal the actual securities being pledged by AIG.

Summary

Collateralisation is an ongoing trend in the financial markets, and it remains a key factor underlying the attractiveness of exchange-traded funds. Nevertheless, both inside and outside the UCITS rules there is a great diversity of practices used in providing the collateral to back tracker funds and notes. There is also limited disclosure of actual collateral held, in contrast to the profuse information available on the index or asset being tracked. Since the exchange-traded products market is very far from a unified model in collateral policies, it pays investors to be aware of how the backing to their investments is provided.

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