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 month.
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 million.
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, he says.
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 says.
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.