UBS Debuts Solid State Drive ETNs

by on September 16, 2011 | ETFs Mentioned:

UBS rolled out the latest exchange-traded products targeting narrow corners of the technology sector in Thursday, debuting a pair of products that offer exposure to companies in the solid state drive industry. The ETRACS ISE Solid State Drive Index ETN (SSDD) will seek to replicate a benchmark comprised of drive manufacturers and component manufacturers, and currently consists of 11 companies in total. UBS also introduced a leveraged counterpart to SSDD; the 2x Monthly Leveraged ISE ETRACS ISE Solid State Drive Index ETN (SSDL) will deliver monthly results that correspond to 200% of the change in that same index.

Solid State Drive 101

A solid state drive is a type of data storage device that has emerged as an alternative to traditional hard disk drives. Unlike HDDs, solid state drives utilize microchips to store data, and feature no moving parts. SSDs have become increasingly popular because they are less easily damaged and offer lower access time and latency–though they are generally more expensive than HDDs. Data stored on SDDs cannot be damaged or altered by magnetic forces [see all the technology ETFs here].

SSDs have been around since the 1990s, but have become more widely used in recent years in “mission critical” applications that need the highest possible storage system speed. SSDs are now used in a number of laptop computers, and are being utilized by a number of different industries including trading firms and streaming media providers.

The largest component in the underlying index is Fusion-io Inc. (FIO), a company that focuses on data decentralization and developing new memory storage platforms to improve overall processing capabilities and speeds. Other significant weights in the index go to Western Digital Corp. (WDC), Seagate Technology (STX), and OCZ Technology [for analysis of all new ETFs, sign up for the free ETFdb newsletter].

Niche Tech ETFs Take Off

SSDD and SSDL are hardly the first exchange-traded products to offer exposure to narrow corners of the global tech industry. Recent months have seen the introduction of a number of hyper-targeted ETPs, including the SmartPhone Index Fund (FONE) and Cloud Computing Index Fund (SKYY), which also replicates an ISE benchmark. SKYY has already accumulated more than $50 million in assets under management, suggesting that a certain amount of investor interest exists for these focused tech products.

Earlier this year, UBS launched a pair of products offering exposure to Internet-related companies that had recently completed an IPO. The duo of Internet IPO ETNs (EIPO and EIPL) have gathered about $13 million in assets since their July launch [see all ETPs in the Technology Equities ETFdb Category].

Monthly Leverage

SSDL will offer monthly leveraged exposure to the underlying index, meaning that the product will reset its leverage once per month. As such, the 2x target multiple is only applicable over the course of a single month; investors buying in during the middle of the month may realize effective leverage greater or less than 2x, depending on the performance of the product [see Leveraged ETNs: Daily, Monthly, And Beyond].

UBS has been aggressive on the product development front; the company recently rolled out a suite of a dozen long and inverse ETNs offering targeted exposure to volatility futures. UBS now offers nearly 40 ETNs, including products focused on MLPs, commodities, and business development companies.

Both SSDD and SSDL are structured as exchange-traded notes (ETNs), which means that they are debt securities whose performance is tied to the movement of the underlying index. Investors in ETNs are exposed to the credit risk of the issuing institution, a feature that was particularly noteworthy given the timing of this product launch. UBS announced on Thursday that a rogue trader in its ETF desk in London had lost $2 billion in unauthorized trades. The cost of insuring UBS bonds against default climbed slightly on the news, and UBS shares dropped sharply [see Tough Times For ETNs].

[For more on the new ETNs, see the Analyst Takes or official fact sheet]

Disclosure: No positions at time of writing, photo is courtesy of HPbladesystem.