A new group of exhange-traded notes is designed to improve
on an initial attempt to track commodity guru Jim Rogerss
international commodity indexes. After a two-week delay because
of Hurricane Sandy, the five new enhanced ETNs
based on Rogers RICI indexes opened for trading on the
New York Stock Exchanges NYSE Arca platform earlier this
Sponsored by the Royal Bank of Scotland (RBS), the group
includes one broad-based, multicommodity ETN (RGRC), and four
ETNs on specific segments: agriculture (RGRA); energy (RGRE);
precious metals (RGRP); and industrial metals (RGRI). Each will
be launched with $4 million in seed capital, says Tom Haines,
RBSs head of Northern American indexes and listed
products, based in Stamford, Connecticut.
Theyre not the first ETNs based on the RICI indexes to
hit the U.S. market. Back in October 2007 Merrill Lynch, now a
subsidiary of Bank of America, launched four ETNs based on
Rogerss indexes as part of its Elements
series. Those ETNs, issued by the Swedish Export Credit
Corporation (SEK), include one ETN for all of the metals (RJZ),
which had $37.3 million in assets as of November 12. Other than
that, its the same line-up, with a multicommodity ETN
(RJI) with $625.7 million in assets; an agriculture ETN (RJA)
with $381 million; and an energy ETN (RJN) with $67.8
The returns on the original ETNs have been less than
impressive, according to Merrills public documents. The
RJI broad-based ETN has a five-year gain of 4.09 percent and a
year-to-date loss of 0.47 percent as of November 12. The
biggest gainer was the RJA agriculture ETN with a five-year
gain of 6.35 percent and a year-to-date gain of 2.57 percent;
the biggest loser was the RJN energy ETN with a five-year gain
of just 0.43 percent and a year-to-date loss of 8.70 percent;
and the RJZ metals ETN had a five-year gain of 4.60 percent and
a year-to-date gain of 2.22 percent.
So why should anyone get excited about another series of
ETNs based on Jim Rogerss indexes? Because RBS believes
that theyve come up with a series that can do better.
The original RICI index that Merrills ETNs follow is
structured so that Merrill is required to consistently reinvest
in front-month futures contracts.
The problem with being locked in to buying that contract is
the phenomenon known as contango, which occurs when the
near-month futures contract is cheaper than those expiring
further out into the future. If the market is in contango, as
the ETN rolls its expiring contracts, it has to sell low and
buy at a higher price.
If the commodity has been in steep contango, the
negative roll yield can significantly eat away at the
funds returns over time, says Dennis Hudachek, an
analyst at IndexUniverse in San Francisco.
But the front-month rolling strategy has its benefits as
well, says Trent Stout, the head of global commodity index and
products at Bank of America Merrill Lynch in Houston.
Sometimes, the market is in backwardation the opposite
of contango and thats favorable to investors,
Stout notes. But also, its a very transparent
strategy, so you know exactly what youre getting,
Perhaps. But Haines says RBSs enhanced
RICI indexes will operate under a different formula that
will take other factors into consideration: the liquidity of
particular futures contracts and the seasonality of specific
commodities. They will also consider whats called
term structure, which is the curve of the futures
market, whether up or down, Haines says.
RBS introduced its Enhanced RICI ETNs in Europe about five
years ago, and in Australia in 2011, Haines says. He says his
corporate counsel wont let him discuss the returns on
investment products that arent registered in the U.S.,
but that the five-year return on the Enhanced RICI Total Return
index through October 2012 was 4.22 percent versus a negative
15.03 percent on the original RICI Total Return index.
RBSs five enhanced RICI ETNs will be sold
as part of the banks Trendpilot line of ETNs,
but will be different in that they will be buy and
hold products, Haines says, noting that the other
Trendpilot ETNs are unique in that they can go to all cash when
certain limits are triggered. (Overseas, the product is known
as the Autopilot line.)
Jim Rogers, reached in Chicago, where he was giving a
speech, says that hes been working with RBS for at
least eight years. The enhanced RICI indexes have been
successful in the rest of the world, he says, so
RBS made the decision to bring them to the U.S.
Rogers says there have been essentially no changes in
the weights in my indexes since the beginning, back in
1998. He says he believes that when it comes to global
consumption, energy is the most important category
extremely important to all of us, he says
followed by agriculture, and metals is third, he
Most indexes, you have no idea what youre buying
because they change them all the time, Rogers says.
To me, as an investor, I want transparency, consistency
and stability, so I know what Im investing in, he
says, by way of explaining why he so rarely reweights. If
we found out that cotton causes cancer, obviously we would meet
and take it out of the index, or if we found out that orange
juice cures cancer, we would have to increase the
weighting, he says, noting that his investment committee
meets formally every December, but there have been very
few changes since 1998.