Should You Worry About Deutsche Bank ETFs?

The financial woes of Deutsche Bank (NYSE:DB) are by now known to all. Shares of the German banking behemoth plunged to levels of the mid-1980s in late September (read: Top ETF Stories of September).

As per a German weekly news magazine, the country’s government rejected any aid to help Deutsche Bank which has been slammed with “a $14 billion fine in the U.S. for mis-selling mortgage-backed bonds before the financial crisis of 2008.” It was this that caused the massacre (read: European Financial ETF in Focus on Deutsche Bank Woes).

Skepticism over the health of this German bank and its ability to pay huge likely fines tormented the stock lately, despite attempts by its senior executives to convince investors that the bank would not require any kind of government aid. If this controversy was not enough, in June, IMF had indicated that “Deutsche Bank's global links make it biggest potential risk.”

Adding to concerns, earlier this year, the Federal Reserve objected to the capital plan of its U.S. unit, Deutsche Bank Trust Corporation, for the second successive year and cited “broad and substantial weaknesses" in its capital planning processes.

While this Deutsche Bank-related confusion and its contagion might have an adverse impact on the European financial ETF iShares MSCI Europe Financials EUFN, there are several other corners of investment which may feel the pinch of Deutsche Bank issues. DB shares have slumped over 43% so far this year (as of October 6, 2016) (see all financial ETFs here).

What AboutDeutsche Bank ETNs?

As per the source, Deutsche Bank has issued 20 exchange traded notes (ETN) as of now for U.S. investors, though 19 of them are listed for trading. A few of Deutsche Bank ETNs are Deutsche Bank FI Enhanced Global High Yield ETN (DE:FIEG) , DB Gold Double Long ETN DGP, DB Crude Oil Double Short ETN DTO and Elements Dogs of the DOW Dow Jones High Yield Select 10 Total Return ETN (CY:DOD) .

Now, investors should note that ETNs are debt securities issued by a bank that are senior but unsecured. Being structured as ETNs, the above-mentioned products carry an associated risk of the issuer’s credit worthiness. If the company goes bankrupt, ETN investors have a high risk of losing money especially because ETNs are unsecured debt.

Then again, investors should note that these ETNs are senior debt too meaning these are loans or securities that get paid before other loans or securities, if the issuer goes bankrupt. Plus, as per etf.com, default risks of Deutsche Bank’s three largest ETNs are medium. Notably, Deutsche Bank has a Zacks ETF Rank #3 (Hold) at the time of writing while its growth and momentum scores are extremely unfavorable at ‘F.’

So, even if it is not too worrisome holding Deutsche Bank ETNs right now, it is not risk-free either. In the current scenario, it will be wise for edgy investors to exit Deutsche Bank ETNs.

Want key ETF info delivered straight to your inbox?

Zacks' free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>