Morgan Stanley Rolls Out Oil-Equity ETN

June 29, 2011

Morgan Stanley serves up a hybrid ETN focused on oil and equities.

 

Morgan Stanley, the New York-based investment bank, today launched a first-ever hybrid ETN that splits its exposure equally between crude oil futures and equities in an effort to provide investors simultaneous exposure to both energy and stocks.

The Morgan Stanley S&P 500 Crude Oil Linked ETN (NYSEArca: BARL) provides investors exposure to both West Texas Intermediate and Brent crude futures as well as to large-cap U.S. equities via the S&P 500 Index. The ETN comes with an annual expense ratio of 0.79 percent.

BARL tracks the S&P 500 Oil Hedged Index, half of which is split between the S&P 500 Total Return Index, with the other half split equally between rolling near-term NYMEX WTI Light Sweet Crude and ICE Brent Crude Oil futures contracts, the company said on its website. The index is rebalanced monthly.

“On each rebalancing, the total crude oil futures exposure will be split equally between WTI and Brent futures contracts and will be equal in weight to the S&P exposure,” Morgan Stanley said on its website.

Oil and stocks have risen largely in lock step since the market crash of 2008-2009, meaning investors in BARL could benefit from that correlation. However, the two markets have diverged as oil has risen enough—usually to more than $100 a barrel—to create concern that soaring energy costs risk undermining economic growth.

That means the ETN could at times serve as a hedging tool should spiking oil prices prompt waves of selling in equity markets. That said, most postwar recessions have been preceded by sharp increases in oil prices, and recessions, in the end, cool equity and oil prices alike.

The company noted that splitting the crude exposure between WTI and Brent crude futures could give investors diversification benefits relative to investing in a single crude oil contract.

Appetite For Oil ETNs

The launch of BARL underscores the interest investors have in oil plays, especially as oil prices, buoyed by unrest in oil-producing countries such as Libya, remain within striking distance of $100 a barrel. NYMEX crude futures closed on June 28 at $92.89.

iPath, UBS and even PowerShares have a few ETNs out in the market, though none of them serves up the dual-exposure scheme that BARL brings to the table.

The $639 million iPath S&P GSCI Crude Oil Total Return ETN (NYSEArca: OIL), for instance, tracks a benchmark solely comprising WTI crude oil futures. That’s similar to the strategy behind the PowerShares DB Crude Oil Long ETN (NYSEArca: OLO). The PowerShares ETN has gathered $18.6 million in assets.

Both OIL and OLO are slightly cheaper than BARL, with expense ratios of 0.75 percent.

Morgan Stanley has another energy-related exchange-traded note on the market, the Morgan Stanley Cushing MLP High Income Index ETN (NYSEArca: MLPY).

Launched in March, MLPY tracks master limited partnerships of energy and shipping assets in North America. The ETN has an annual expense ratio of 0.85 percent.

Credit risk is something all ETNs share. They are only as reliable as their issuer—Morgan Stanley, in the case of BARL or MLPY. Should the issuer ever go bankrupt, ETN holders are left holding the bag, as some discovered when a number of Lehman Brothers ETNs shut in connection with that firm’s collapse in September 2008.

 

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