Which financial product is most negatively affected by a downgrade in the issuer's credit rating?

The financial product that is most negatively affected by a downgrade in the issuer's credit rating is exchange-traded notes (ETNs). ETNs are unsecured debt instruments issued by financial institutions, which means they are essentially a promise to pay the investor the return of a specific market index or benchmark, minus fees. When the credit rating of the issuer is downgraded, it directly impacts the perceived creditworthiness and financial health of the issuer.

The immediate consequence of this downgrade is an increase in the perceived risk associated with the ETNs, which can lead to increased volatility in their pricing and potentially a significant decrease in market value. Investors may demand higher yields to compensate for the increased risk of holding the ETNs issued by the downgraded entity, making them less attractive in the market.

In contrast, corporate bonds do react negatively to downgrades, but are typically evaluated on their merits compared to similar bonds. Mutual funds, depending on their composition, may be insulated from individual issuer downgrades as they include diversified holdings. Government securities generally carry a lower risk profile due to their backing by the government and are less influenced by issuer credit ratings in comparison to ETNs.