In the ETF industry, sometimes when it rains, it pours. The last two weeks have seen an unprecedented blitz of new product launches, with several issuers rolling out dozens of first-to-market products. Wednesday saw Rydex beef up its equal-weighted offerings, Direxion debut its first non-leveraged ETF, and the Royal Bank of Scotland dip its toes into the U.S. ETF waters. RBS Securities, a unit of RBS, launched on Wednesday the RBS U.S. Large Cap Trendpilot ETN (TRND), a product that alters its investment strategy depending on recent market trends.
The underlying RBS US Large Cap Trendpilot Index employs a systematic trend following technique–a strategy popular with both active traders and money managers with a longer term focus. When the S&P 500 Total Return Index is above its historical 200-day simple moving average for five consecutive trading days, a bullish trend is recorded and the index establishes exposure to equity markets (as represented by the S&P 500 Total Return). When the same index trades below its 200-day moving average for five consecutive days, the strategy shifts exposure into low-risk Treasuries (specifically, delivering the yield on a hypothetical notional investment in 3-month U.S. Treasury bills). When there is no observable trend (i.e., the index has not closed above or below the 200-day SMA for five consecutive sessions), the index will maintain its strategy from the previous day [see Contrarian ETF vs. Momentum ETF].
The index was created less than a month ago, but backtested results show that the trend-following strategy would have delivered higher returns and lower volatility than the S&P 500 historically–thanks in no small part to theoretically watching the market collapse of 2008 from the sidelines. The strategy implemented by the new ETN would protect investors from extended bear markets since it moves exposure to cash when a bearish trend is detected. But it can also participate in extended rallies, though it may miss out on the beginning of a bull market before the SMA is crossed. “As a leading global provider of exchange traded and index-linked products, the launch of an ETN offering in the U.S. is a natural fit for us,” said Michael Nelskyla, Head of Structured Retail Distribution, Americas. “The RBS US Large Cap Trendpilot ETNs enable investors to gain exposure to the S&P 500 Total Return Index utilizing an objective and transparent trend-following strategy.”
The closest ETP comparable to TRND may be the ETN+ S&P VEQTOR ETN (VQT) offered by Barclays. That product is linked to an index that allocates exposure among three asset classes–equities, cash, and volatility–depending on current market conditions. The rules behind the Barclays product depend on observed volatility in the markets, while the new RBS ETN takes its cues from developing trends in stock markets.
TRND is an unsecured and unsubordinated obligation of the Royal Bank of Scotland, and as such investors are exposed to the credit risk of the issuer. As investors have grown more confident in the financial health of banking institutions, ETNs have seen a surge in popularity in 2010. Through the first 11 months of the year, inflows into ETNs topped $5 billion.
Like the strategy, the expense structure for the new RBS ETN will also be unique. When a bullish signal has been detected and the index is invested in the S&P 500, expenses will accrue at an annual rate of 1.0%. When the index is invested in cash, expenses will accrue at 0.50% annually.
Disclosure: No positions at time of writing.