RBS Launches Shifting-Exposure Equity ETN

September 06, 2012

RBS adds an ETN to its lineup that shifts between three different riffs on the S&P 500 Index.

The Royal Bank of Scotland, the bank behind the U.S.-listed “Trendpilot” exchange-traded notes, today launched an ETN that offers investors exposure to one of three different pockets of the U.S. large-cap equities universe, serving up three flavors of risk in one portfolio with the different mode determined by relative strength technical indicators.

The RBS US Large Cap Alternator Exchange Traded Note (NYSEArca: ALTL) toggles between exposure to the S&P 500 Total Return Index, the S&P 500 Low Volatility Total Return Index or the S&P 500 Equal Weight Total Return Index, RBS said in a prospectus describing the ETN. Which of the three is engaged depends on the relative performance of the underlying indexes based on their average historical returns.

ALTL’s alternating methodology is unique in that it serves up three levels of risk exposure within the U.S. equity space, picking the best of the three at a given time. The ETN is not a risk-on/risk-off strategy like RBS’ “Trendpilot” alternating ETNs that switch exposure between their respective benchmarks and a cash rate.

The strategy comes at a time when many investors are trimming their exposure to U.S. equities as they navigate what appears to be an environment of stalling U.S. economic growth. In the month of August alone, U.S. equity ETFs bled more than $4.11 billion in assets, while fixed-income funds absorbed $3.88 billion, according to data compiled by IndexUniverse.

ALTL, which matures on Sept. 5, 2042, comes with an annual management fee of 1.00 percent, the prospectus said. ALTL is RBS’ eighth ETN, all but one of them a TrendPilot ETN with the dual-mode exposure scheme.

The Methodology

RBS said the differing exposure of ALTL is based on a “Relative Strength Score” that is assigned to each underlying index each month, and is the simple average of the returns of that given index for the prior one-month, three-month, six-month, nine-month and 12-month periods.

Applying a rules-based methodology, the index will track the return of the underlying index with the highest relative strength score on any determination date, but not the other two underlying indices, for the following month.

By comparison, ALTL’s closest counterpart—another RBS ETN, the (NYSEArca: TRND)—alternates exposure between equities and Treasurys using an S&P 500 moving average as a trigger to determine the switch.

As of Aug. 30, the date of the pricing supplement, the index was tracking the S&P 500 Low Volatility Total Return Index, the company said.

ETNs are unsecured and unsubordinated senior obligations subject to an issuer’s credit—in this case, the Royal Bank of Scotland.

ALTL, as noted, is the company’s eighth ETN, joining RBS’ growing roster of ETNs that tap into U.S. large-cap and midcap stocks, Chinese stocks, the Nasdaq 100, gold and oil.



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