Goldman Sachs has declared a quarterly income distribution of $0.524722 per ETN for their Claymore CEF Index-Linked GS Connect Exchange Traded Note for the the third quarter of 2008. The ex-payment date is October 1, 2008, and payment will be made on October 15, 2008.

With the failure of Lehman Brothers to find a buyer and its subsequent bankruptcy, all of its Opta ETNs have stopped trading, and are now worthless. It will be interesting to see how this situation affects the future of all other ETNs, since it has proven that ETN holders are exposed to credit risk as well as risk of their investment losing value due to a decline in the underlying value of the security.

With Lehman Brothers on the verge of bankruptcy and other ETN issuers in trouble due to the credit crisis, many investors are wondering if ETNs are still a safe investment. It appears that many investors feel that their ETNs are not at a great risk of default at this time, because they are still trading near their fair market value, but this is something worth keeping a eye on, so that your ETNs do not plummet in value quickly if Lehman or another issuer declares that they will default on the notes.

The Goldman Sachs Group, Inc. announced today that holders of record of the Claymore CEF Index-Linked GS Connect Exchange Traded Notes as of April 3, 2008 would receive a quarterly income distribution of $0.280964 per note held. Payment will be made on April 14, 2008.

Barclays announced today that it will introduce three new currency exchange traded notes that will track baskets of currencies in the Middle East, Asia, emerging markets, and currencies that benefit from the carry trade.

The new ETNs are named Asian and Gulf Revaluation ETN, Global Emerging Markets Strategy ETN, and Intelligent Carry Index ETN.

The Asian and Gulf Revaluation ETN is designed to track the yuan, Hong Kong dollar, Saudi Arabian riyal, Singapore dollar and United Arab Emirates dirham, and was named because these countries are likely to revalue their currencies due to the weakness in the dollar and higher oil prices.

The Global Emerging Markets Strategy ETN is designed to track 15 emerging market currencies in Asia, Latin America and Eastern Europe using money market funds.

The Intelligent Carry Trade ETN follows the world's 10 most liquid currencies, going long in currencies that pay higher interest rates, and short in ones with lower rates, simulating the returns from the carry trade.

Each of these ETNs will be indexed to a basket of currencies, instead of a single currency like Barclay's other iPath ETN offerings. The structure of these notes may have been influenced by an Internal Revenue Service ruling that decided to tax single currency ETNs as debt instruments. Because of this, investors who hold the note may have to pay taxes on gains in the value of the ETN at ordinary income rates (which can be as high as 35%), instead of the 15% capital gains rate, despite the fact that the investor does not actually receive any income until the note is sold or matures.

The Asian and Gulf Revaluation ETN and Global Emerging Markets Strategy ETN pay interest each quarter.

Morgan Stanley launched their first two ETNs today, with both ETNs focusing on emerging market currencies.

The Market Vectors-Indian Rupee/USD ETN is on the S&P Indian Rupee Total Return Index, which seeks to track the performance of India’s currency, the rupee, relative to the U.S. dollar.

The Market Vectors-Chinese Renminbi/USD ETN is based on the S&P Chinese Renminbi Total Return Index, which seeks to track the performance of China’s currency, the renminbi, relative to the U.S. dollar.

In addition to the value gained or lost from fluctuations in the indexes, holders of the note will earn interest based on the U.S. Federal Funds interest rate, not the local interest rates for the currency held.

Van Eck is the marketing agent for these ETNs, which charge a 0.55% annual fee and trade on the NYSE Arca exchange.

A representative of the Securities Industry and Financial Markets Association (SIFMA) testified before the House of Representatives today that a bill under review that would modify the tax treatment of exchange traded notes would do more harm than good to the investment community. Leslie B. Samuels from the law firm of Cleary Gottlieb Steen & Hamilton, said on behalf of SIFMA that "We are concerned that H.R. 4912 would impose an overly complex tax regime that would single out prepaid derivative contracts for unfavorable treatment by requiring that investors include amounts in income that they have no right to receive—and may never receive."

He pointed out that mutual funds and ETNs are different types of financial instruments, and should be treated as such. One key difference is that ETN holders have no right to any cash distributions, and ETNs do not confer ownership of any asset to the holder.

Another key point made by Samuels is that, “the difference between the tax treatment of ETNs and mutual funds is based on a fundamental rule of tax law that an investor who has the full right to take cash income, but elects not to, is subject to taxation on that cash as if it were received. Taxpayers cannot avoid tax on cash they could put in their pockets simply by using it for other purposes. This is why investors in mutual funds are taxed currently on distributions from the mutual fund even if they choose to reinvest the cash. In short, investors in mutual funds are taxed on distributions because they have the choice of keeping the cash or reinvesting it.”

Because ETN holders do not have any right to cash income from the ETN, any tax imposed on unrealized gains would be a tax on "phantom" income that may never be realized.

Samuel's final point is that ETNs should be treated like prepaid derivative contracts since they are similar in structure. These instruments have been in existence for 15 years, and are not taxed like debt, therefore any attempts to tax them or ETNs as such would be unfair.

ETNs have been under fire from the mutual fund industry as they have become more popular, with firms like Vanguard asking Congress to tax ETNs in the same manner as ETFs and mutual funds to remove one of the advantages of ETNs. As Samuels pointed out today on behalf of SIFMA, these claims are flawed, and most likely based on concern over a new competitor for investor funds, rather than an interest in fairness.

With Lehman Brothers recently listing their first ETNs with a focus on the commodities and private equity sectors, both the Wall Street Journal and Investors' Business Daily interviewed Warun Kumar, their managing director of structured investments for the Americas.

He said that they chose to use ETNs rather than ETFs because the investment bank has more expertise in debt offerings, and that commodities and private equity are harder to track with traditional ETFs because most indexes are based on equities, so an investor has to buy stocks linked to that commodity to get exposure.

Kumar also stated that they chose the commodities and private equity sectors because they aren't covered by many ETFs or ETNs, though there are a number of commodity ETNs already.

Finally, Kumar expressed his opinion on the growing competition between ETFs and ETNs. He said, "ETNs are the better wrappers for investing in commodities and alternative-asset classes. As ETFs get into more illiquid and complex asset classes, ETNs look like the better format."

Deutsche Bank listed the DB Gold Double Short ETN (DZZ), DB Gold Double Long ETN (DGP) and DB Gold Short ETN (DGZ) on the NYSE Arca on Thursday.

According to Deutsche Bank, "The ETNs will be the first to offer investors short or leveraged exposure to gold: the DB Gold Double Short ETNs offer investors exposure to two times the monthly inverse performance of the gold index plus a monthly T-Bill index return; the DB Gold Double Long ETNs offer investors exposure to two times the monthly performance of the gold index plus a monthly T-Bill index return; and the DB Gold Short ETNs offer investors exposure to the monthly inverse performance of the gold index plus a monthly T-Bill index return."

One of the positive aspects of the short ETNs are that they allow investors to short gold within a 401(k) or IRA, which do not allow short selling of any security.

Lehman Brothers announced that they are listing three new ETNs tomorrow, which will be their first entries into the rapidly growing exchange traded note market. The offerings are:

• The Opta Lehman Brothers Commodity Index Pure Beta Agriculture Total Return ETN, which will trade under the symbol EOH and track corn, soybean meal, soybean oil, soybeans, wheat, coffee, cotton, and sugar future prices. It is designed to spot commodity returns in those markets.
• The Opta Lehman Brothers Commodity Index Pure Beta Total Return ETN, which will trade under the symbol RAW with a focus on the energy, metals, agriculture and livestock. It is also designed to spot commodity returns in those markets.
• The Opta S&P Listed Private Equity Index Net Return ETN, which will trade under the symbol PPE and track the S&P Listed Private Equity Index Net Return, which contains the stocks of 30 publicly listed private equity companies.

The private equity ETN is the first ETN to track any type of private equity index, while the commodity ETNs will be competing with existing iPath ETNs from Barclays and Elements ETNs from SEK. The commodity ETNs charge an annual fee of 0.85%, and the private equity ETN charges an annual fee of 0.75%. These fees are lower than the expenses charged by ETFs that cover the same sectors, which may make them more attractive to investors.