RBS rolled out the fourth product in its Trendpilot suite on Thursday, debuting an ETN that combines exposure to crude oil with a popular trend following strategy. The RBS Oil Trendpilot ETN (TWTI) is linked to the RBS Trendpilot Index, a dynamic benchmark that oscillates between oil futures and cash depending on recent price trends. When the RBS 12-Month Oil Total Return Index is above its 100-business day simple moving average for five consecutive days, the note will track the performance of that benchmark. If the index closes below its moving average for five straight days, the note will pivot its exposure into cash. According to the RBS Web site, TWTI is currently tracking the cash rate.
The underlying index is comprised of 12 futures contracts on light sweet crude oil (WTI) traded on the NYMEX, including the contract scheduled to expire in the next calendar month and the contracts scheduled to expire in each of the 11 months following. That allocation is similar to the exposure offered by the United States 12-Month Oil Fund (USL), which has about $200 million in assets. So it’s important to note that the exposure offered is determined not by the price of spot crude, but rather by movements in an index comprised of futures contracts linked to the important energy commodity. In other words, the slope of the oil futures curve will have an impact both on the timing of switches between the two types of exposure and the returns generated when TWTI is “switched” to the oil futures index [for reviews of all new ETFs, sign up for the free ETFdb newsletter].
Unique Expense & Tax Considerations
TWTI becomes the fourth product in the Trendpilot lineup, joining two similar offering focusing on U.S. equities and a gold ETN:
- U.S. Large Cap Trendpilot ETN (TRND)
- U.S. Mid Cap Trendpilot ETN (TRNM)
- U.S. Gold Trendpilot ETN (TBAR)
Like each of these ETNs, TWTI will feature a unique expense structure that changes depending on the type of exposure being offered. When the note is tracking the oil index, TWTI will charge 1.10%; when offering the cash rate, the tracking fee will drop to 0.50%.
The trend following strategy is nothing new; investors have been implementing techniques that revolve around moving averages for decades. And because the methodology employed by TWTI is relatively straightforward, investors can obviously replicate the strategy on their own; moving in and out of USL based on price levels would be a pretty good proxy. So at first, the expenses charged by TWTI might seem on the high side [see 25 Most Expensive ETFs].
But it’s important to consider that the combination of this strategy with the ETN wrapper allows investors to potentially sidestep some of the biggest drawbacks associated with trend following techniques. Frequently moving in and out of positions can result in regular taxable events, and also has the potential to run up significant commissions in the process. Because TWTI is structured as an ETN, investors will generally only incur a tax liability when they liquidate a position–not every time the exposure switches between oil and cash. Moreover, because there is no underlying pool of futures–TWTI is a debt security issued by RBS–investors can avoid incurring brokerage commission and other expenses often incurred in trend following [see Tax Advantages Of ETNs].
Thanks in part to these structural nuances, the suite of RBS ETNs have become popular tools with investors; the three existing products have gathered aggregate assets of about $75 million in a relatively short period of time.
Trend Following ETN In Action
Trend following has become popular in part because it minimizes the downside loss potential of an investment; disciplined selling when a security moves below a specified level can curtail losses if the decline continues. A head-to-head comparison of TRND against SPY highlights the potential for this strategy to limit downside loss. While SPY has slipped by about 2.3% over the last two weeks, TRND has held steady thanks to the allocation to cash [see When ETNs Are Better Than ETFs].
There are, of course, two sides to that coin; when a security bottoms out and begins a move higher, trend following techniques can miss out on the early stages of a rally.
Disclosure: No positions at time of writing.