RBS Launches Mid-Cap ‘Trendpilot’ ETN

January 27, 2011

RBS replicates TRND’s two-tiered exposure profile in an ETN focused on mid-cap stocks.

RBS Securities Inc., a unit of Royal Bank of Scotland, today launched another “Trendpilot” ETN with dual return and expense profiles—the new one focused on U.S. mid-cap companies on the upside and also having downside protection should the stock market face a sustained sell-off.

The RBS US Mid Cap Trendpilot Exchange Traded Notes (NYSEArca: TRNM) will track the S&P MidCap 400 Total Return Index when the market is in an uptrend and have ”hypothetical notional” exposure to yields on three-month Treasury bills when the market is in a bearish phase. Its expense ratio will be 1.00 percent when it’s linked to stocks and 0.50 percent when it’s linked to T-bills, RBS said in a press release.

TRNM is built similarly to the the RBS US Large Cap Trendpilot Exchange Traded Note (NYSEArca: TRND) the company launched in December, except that TRND’s stock exposure is linked to the large-cap S&P 500 Total Return Index. The new ETN’s two-tiered cost structure is the same as TRND’s. TRND has gathered about $4.2 million in assets since its rollout, according to data compiled by IndexUniverse.com.

Shifts in TRNM’s returns, just like those of TRND, are dictated by the security’s price relative to its 200-day moving average. Investors will earn S&P 500 Total Return Index returns as long as TRND’s price is above the 200-day moving average. Exposure wouldn’t change to T-bill returns until the price fell below the 200-day moving average for at least five days, and vice versa.

ETNs Vs. ETFs

Exchange-traded notes differ from the more common ETFs in that ETNs are debt securities backed by the issuer; in this case, an RBS unit. Should the ETN issuer go into bankruptcy, the investor loses his stake.

Credit risk notwithstanding, ETNs enjoy a number of advantages over ETFs—first and foremost that ETNs don’t have tracking error the way ETFs do. The issuer promises the returns, minus expenses, of the underlying index, or indexes in the case of RBS’ “Trendpilot” products.

In the cases of TRNM and TRND, ETF wrappers could end up being the cause of quite a lot of tracking error because shifting holdings back and forth between the S&P 400 and T-bills would be logistically challenging and likely include extra costs associated with portfolio turnover.

The ETN will have no taxable distributions throughout the life of the security. For an investor, that means no taxes on the note unless one of three things happen: The investor sells the note; the issuer calls or retires the note; or the note matures. TRNM matures in January 2041.

 

 

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