UBS Launches Risk On / Risk Off ETNs

by on December 1, 2011 | ETFs Mentioned:

UBS, the issuer behind one of the broadest lineups of ETNs available to U.S. investors, continued the aggressive expansion of its product lineup this week with the introduction of two unique offerings. The company rolled out a pair of blunt instruments designed to be used in high level “risk on / risk off” trades, a term that has become popular in recent months as risky assets have exhibited strong correlations with one another and so-called “safe havens” have thrived whenever uncertainty pops up. The new ETRACS Fisher Gartman Risk On On ETN (ONN) will seek to replicate the Fisher-Gartman Risk Index, a benchmark that includes long positions in various risky asset classes such as stocks and commodities and short positions in traditional safe haven investments such as sovereign bonds. The index consists of 150% long positions combined with 50% short exposure, resulting in a net 100% long portfolio:

Sector Long Weighting Short Weighting
Energy 48% 0%
Equities 46% 0%
Currencies 28% -16%
Sovereign Bonds 0% -34%
Agriculture 18% 0%
Metals 10% 0%
TOTALS 150% -50%

Each broad asset class consists of a number of individual positions; for example, the energy exposure includes positions in crude oil, Brent crude, heating oil, and unleaded gasoline, among others. The equity position includes various positions in both domestic and international equity ETFs:

Sector Index Component Long/Short Exposure Weight
Energy Dow Jones-UBS Crude Oil Subindex (DJ-UBS CICL) Long 20.00%
Sov’n Bonds 10yr US T-Note – CBOT Listed Futures (ZN) Short -16.00%
Energy Dow Jones-UBS Brent Oil Subindex (DJ-UBS CICO) Long 14.00%
Currencies Euro Currency – CME Listed Futures (6E) Long 14.00%
Currencies Japanese Yen – CME Listed Futures (6J) Short -12.00%
Sov’n Bonds 30yr German Bund – Eurex Listed Futures (FGBL) Short -12.00%
Agriculture Dow Jones-UBS Corn Subindex (DJ-UBS CIC) Long 10.00%
Equities SPDR S&P 500 ETF Trust (Ticker: SPY) Long 9.20%
Currencies Australian Dollar – CME Listed Futures (6A) Long 8.00%
Sov’n Bonds 10yr Gilt – LIFFE Listed Futures (R) Short -6.00%
Energy Dow Jones-UBS Heating Oil Subindex (DJ-UBS CIHO) Long 6.00%
Metals Dow Jones-UBS Copper Subindex (DJ-UBS CIHG) Long 6.00%
Currencies Canadian Dollar – CME Listed Futures (6C) Long 6.00%
Equities iShares MSCI Hong Kong Index Fund (Ticker: EWH) Long 5.52%
Equities PowerShares QQQ Trust, Series 1 (Ticker: QQQ) Long 5.52%
Currencies Swiss Franc – CME Listed Futures (6S) Short -4.00%
Energy Dow Jones-UBS Unleaded Gasoline Subindex (DJ-UBS CIRB) Long 4.00%
Energy Dow Jones-UBS Gas Oil Subindex (DJ-UBS CIGO) Long 4.00%
Agriculture Dow-Jones UBS Wheat Subindex (DJ-UBS CIW) Long 4.00%
Agriculture Dow-Jones UBS Soybeans Subindex (DJ-UBS CIS) Long 4.00%
Metals Dow Jones-UBS Silver Subindex (DJ-UBS CISI) Long 4.00%
Equities SPDR Dow Jones Industrial Average ETF Trust (Ticker: DIA) Long 3.68%
Equities iShares S&P 500 Index Fund (Ticker: IVV) Long 3.68%
Equities Rydex S&P Equal Weight ETF (Ticker: RSP) Long 3.68%
Equities iShares MSCI Brazil Index Fund (Ticker: EWZ) Long 3.22%
Equities SPDR EURO STOXX 50 Fund (Ticker: FEZ) Long 3.22%
Equities Semiconductor HOLDRs Trust (Ticker: SMH) Long 1.84%
Equities Vanguard Large-Cap ETF (Ticker: VV) Long 1.79%
Equities iShares MSCI EAFE Index Fund (Ticker: EFA) Long 1.38%
Equities Vanguard MSCI European ETF (Ticker: VGK) Long 1.38%
Equities WisdomTree Dreyfus Brazilian Real Fund (Ticker: BZF) Long 0.46%
Equities Guggenheim BRIC ETF (Ticker: EEB) Long 0.46%
Equities First Trust Dow Jones Internet Index Fund (Ticker: FDN) Long 0.46%
Equities Market Vectors Russia ETF (Ticker: RSX) Long 0.46%
Equities Schwab U.S. Large-Cap ETF (Ticker: SCHX) Long 0.05%
Total 100%

So ONN effectively offers exposure to a portfolio that consists of thousands of individual securities, ranging from commodity futures contracts to Russian stocks to the Brazilian real. By combining long positions in risky assets with short positions in bonds that tend to perform well in tumultuous environments, ONN is constructed as a fund that should perform quite well when risk aversion drops and investors pile into asset classes such as stocks and commodities [see ETFs To Smooth Volatility].

Risk OFF

Also debuting this week is the “risk off” counterpart to ONN; the ETRACS Fisher-Gartman Risk Off ETN (OFF) delivers daily inverse exposure to the same index to which ONN is linked. That means that ONN is effectively short risky assets such as international stocks and emerging markets currencies, and long in assets such as the Swiss franc, the Japanese yen, U.S. Treasuries, and long-term German bonds. So that product could be useful for investors looking to bet on a dip in equity markets; when a wave of risk aversion strikes, the asset classes in which this product maintains short positions should generally decline in value, while safe havens will get a boost from investors looking to preserve capital [see our Simple (But Effective) Safe Haven Portfolio].

Disclosure: No positions at time of writing.