The ELEMENTS Of Expansion

April 10, 2008

Merrill Lynch's ETN platform adds four products in the early days of April.

 

April has been a busy month for the ELEMENTS platform. Within the first two weeks it has seen the launch of four new exchange-traded notes, all issued by Credit Suisse (rated AA-/Aa1). Three cover sections of the commodities market, while the third offers exposure to the industry that has arisen around efforts to combat and deal with global warming.

The ELEMENTS platform currently includes nearly 20 ETNs. Although it has roughly the same number of products as the Barclays iPaths, it does not approach the iPaths family in terms of assets, which are in the billions of dollars. However, the ELEMENTS platform, which is managed by Merrill Lynch, represents the second-largest family of ETNs currently trading; like the iPaths, it covers currencies, commodities and investment strategies.

The three new commodities ETNs track indexes from Merrill Lynch marketed under the MLCX brand that cover livestock, precious metals and gold. The MLCX (Merrill Lynch Commodity index eXtra) is an index of 18 different commodities; the contracts are selected based on liquidity and weighted according to their importance in the global economy, according to Merrill. The index's methodology rolls each component into the next available contract month during a 15-day period in the month prior to the original contract's expiration month. Meaning, if the contract was expiring in June, the rolling process would take place in May.

The MLCX Precious Metals ELEMENTS ETN (NYSE Arca: PMY) covers gold (52%), silver (32%), platinum (8%) and palladium (8%). The MLCX Livestock ELEMENTS ETN (AMEX: LSO) tracks futures contracts in lean hogs (30%) and live cattle (70%). The MLCX Gold ELEMENTS ETN (AMEX: GOE) invests only in gold futures contracts. Although PMY and LSO both charge annual expense ratios of 0.75%, GOE charges just 0.375%, making it one of the cheapest ETNs available.

PMY is the first ETN to cover the precious metals sector, while GOE will compete directly with the newly launched E-TRACS UBS CMCI Gold Total Return ETN (NYSE Arca: UBG), which offers almost identical exposure to lean hogs and live cattle to that of LSO - and at the same price.

The Global Warming ELEMENTS ETN (NYSE Arca: GWO) is a unique product that tracks the Credit Suisse Global Warming Index, which covers 50 companies with business activities focused on reducing global warming, such as the production of alternative energy and energy efficiency solutions. Companies are selected to the index based on a multilayered methodology that determines the final component list based on rankings that incorporate performance, momentum and valuation. Although many indexes have been created that focus on alternative energy and global warming, and there are a few ETFs that cover alternative or clean energy, this is the first ETN to delve into this area.

It looks like the ELEMENTS platform is trying to catch up to the iPaths, but that may be hard to do. The iPaths have one large blockbuster ETN - the iPath DJ-AIG Commodity Index Total Return ETN (NYSE Arca: DJP) that has more than $3 billion in assets; that's more than all other ETNs combined. The whole iPath family is worth assets approaching nearly $5 billion, while all of the ELEMENTS added together are worth less than $500 million.

However, the ELEMENTS are a little bit different - the ELEMENTS platform accommodates multiple issuers, meaning that all the ETNs are not reliant on the credit of just one company. Currently, the issuers include Credit Suisse, Deutsche Bank (rated AA/Aa1) and Swedish Export Credit Corp. (known as SEK and rated AA1/AA+). In light of the near-bankruptcy of ETN issuer Bear Stearns, investors may appreciate some diversification in their issuers; for example, some of the MLCX commodities ETNs on the ELEMENTS platform are issued by Credit Suisse and some are issued by SEK. The involvement of multiple issuers in one suite of products may make investors feel comfortable investing large amounts in more than one product.

View the prospectus for PMY here.

View the prospectus for LSO here.

View the prospectus for GOE here.

View the prospectus for GWO here.

 

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