RBS Unveils Crude Oil ‘Trendpilot’ ETN

September 15, 2011

RBS rolls out another ETN with alternating types of exposure—and two expense ratios.

RBS Securities, the unit of the Royal Bank of Scotland that launched its first U.S.-listed exchange-traded note last year, rolled out a new crude oil-based ETN today, the fourth in its suite of products that serves up alternating exposure to two asset classes to allow investors to profit in rising markets and protect principle when markets are falling.

The RBS Oil Trendpilot ETN (NYSEArca: TWTI) tracks the RBS Oil Trendpilot Index, a proprietary “trend-following” strategy that provides hypothetical exposure to either West Texas Intermediate crude oil futures or to the yield of three-month U.S. Treasury bills.

On its website, the company said TWTI provides hypothetical equal-weighted exposure to 12 crude contracts on the New York Mercantile Exchange—a scheme that makes it similar to the United States 12 Month Oil ETF (NYSEArca: USL).

Like its other Trendpilot ETNs, TWTI has built-in downside protection for investors: the three-month “T-Bill rate,” which kicks in should the oil index’s price fall below its 100-day moving average for at least five straight days. The company’s other Trendpilot ETNs have switching exposures that are triggered by moves above or below 200-day moving averages.

The downside protection TWTI is designed to provide also comes with a price break. When the ETN is tracking NYMEX crude, TWTI investors pay an annual expense ratio of 1.10 percent of assets under management. But when the ETN switches over to T-Bills, the expense ratio declines to 0.50 percent. The other three ETNs cost 1.00 percent or 0.50 percent.

The company’s three previous offering are:

  • RBS US Large Cap Trendpilot Exchange Traded Note (NYSEArca: TRND)
  • RBS US Mid Cap Trendpilot Exchange Traded Notes (NYSEArca: TRNM)
  • RBS Gold Trendpilot Exchange Traded Note (NYSEArca: TBAR)

 

How Exposure Changes

Again, TWTI’s dual-exposure scheme is designed in the following manner: If the price of the crude oil index is at or above its 100-day moving average for five consecutive days, then investors will be exposed to crude oil via the 12-month equal-weighted oil index and will have no exposure to the T-bill rate.

Conversely, the exposure switches to tracking the T-Bill rate when the crude index trades below its 100-day moving average for five consecutive days.

The 12 oil futures contracts that make up the index on any given day will be the contract scheduled to expire in the immediately following calendar month as well as the futures contracts scheduled to expire in each of the 11 months thereafter, the company said on its website. RBS said it will rebalance monthly so that each of the 12 futures contracts is equally weighted.

As an ETN, TWTI gives investors the returns of the two hypothetical indexes, minus expenses, but without the tracking error that detracts from returns in an exchange-traded fund.

But, unlike an ETF, ETNs are unsecured debt obligations—backed by RBS in the case of its Trendpilot ETNs—meaning that if the issuer were ever to declare bankruptcy, investors would likely lose their investments.

TWTI will mature in 20 years, on Sept. 14, 2041.

 

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