Why Have Equity Exposure in an ETN?

| About: ELEMENTS Ben (BVT)

By Jim Wiandt

Matt Hougan's latest piece is a very illuminating profile of a $2.5 million credit-risk-loaded equity-based product (NYSE:BVT).

Matt has given us some very interesting data, which vividly demonstrates that if you invest in very different things, even if you call them the same thing, you may get very different-looking returns.

First, Matt, let me help you on WHAT exactly is in your "total market" Benny Graham fund. I know you had some trouble with this, but I threw a Wiki at it, and here's what I came up with:

"The Index tracks the value of a portfolio of one hundred U.S. stocks that are selected from the 3,000 largest U.S. companies by market capitalization according to the Benjamin Graham Methodology, developed by Nuveen HydePark."

My question is, why are you comparing a fund that randomly selects one hundred stocks to total stock market funds (and could effectively be a microcap or a clean tech or a stocks-that-have-R-in-their-ticker, when you should be comparing it to, say SPA MarketGrader funds, or Janus funds? Just because they decided to name this fund "The Benjamin Graham Total Market Value Index - Total Return" doesn't make it so.

I agree with your general point that returns can vary wildly within a given asset class, but I'm not sure how illuminating it is to outline this by comparing what are effectively active/alpha-seeking funds to index funds that could be invested in very different asset classes (which if you do compare apples to apples, in your total market example are generally returning within 100 bps of each other).

Much more interesting charts to me are the ones here:

Cool Asset Class Charts that Blow Matt's Charts Away

This comes from Craig Israelsen's seminal 2007 article laying bare the wild variation of indices supposedly covering the same asset class. Active funds can rarely represent to be representative of an asset class, particularly if they're running at, say, 1400 point of positive tracking error to the supposed "total market" they are covering. Today's 14% outperformance is frequently tomorrows 30% reversion to the mean. But the debate (which is being fought among indices) is a very interesting one.

Finally - why on earth should we buy 100 equities in a note structure? At 75 basis points? It seems to me like gratuitous credit risk for a normally priced active fund (running at 3X or so the ER of a typical ETF). So I'm not sure what we're featuring here, Matt, and I'm also not sure I'm going to run out and buy a fund that just outran the market by 1400 bps, and is wrapped in a structure that owes its security to a financial institution. I do like the fund name, though.