What's The Point Of RBS's Trendpilot ETNs Anyway?

by: Jari Ulmer

With equities knocking more than one out of the ballpark in 2013 investors probably aren't unwise in thinking it might be time to find a more stable platform for their investment. A very small portion of the market has taken to a unique cropping of multi-class Exchange Trade Notes (ETNs) pioneered by the Royal Bank of Scotland. They're called "Trendpilots," and they aim to limit the volatility of their underlying benchmarks using a price trending strategy.

With an already overly saturated ETF/ETN market many of you might be wondering why yet another company has come up with yet another market instrument, and if they've really offering anything new this time. In this article I'll breakdown the competing theories behind RBS's strategy and compare these funds' performance with their most popular rival ETFs.

Currently RBS offers 6 flavors of Trendpilots:



RBS US Large Cap Trendpilot ETN (NYSEARCA:TRND)



RBS China Trendpilot ETN (NYSEARCA:TCHI)

The strategic approach RBS takes is simple. From their website for TBAR:

"If the Price of Gold Bullion is at or above its historical 200-Index business day simple moving average for five consecutive Index business days (i.e., a "positive trend" is established), the Index will track the return on the Price of Gold Bullion, and will have no exposure to the Cash Rate until a negative trend occurs. Conversely, if the Price of Gold Bullion is below such average for five consecutive index business days (i.e., a "negative trend" is established), then the Index will track the Cash Rate instead of the return on the Price of Gold Bullion and will have no exposure to the Price of Gold Bullion until the next positive trend."

Now RBS has worked out what they believe to be the optimum indexing period, which varies between funds. They also charge a varying fee depending on what asset the fund is currently tracking. The table below illustrates these differences:

There's three main Schools of Thought I can think of as to why investors would want to choose these funds over their benchmark:

School 1: Beat The Benchmark

Theoretically if RBS's strategy works, investors should be able to gain exposure to the upside of their preferred benchmark while limiting their downside. In the long run this strategy should equate to higher yields than the underlying benchmark. Excellent for investors looking to enter a market class without the time or patience to actively manage their position. RBS even suggests "...Trendpilot ETNs may be an alternative for traditional "buy and hold" investors."

Of course, whenever I hear something that sounds like market timing I instantly envision a bright yellow book cover screaming "For just $19.99 *YOU* can make millions in the stock market!"

The trouble with this, and almost all market timing strategies, is that they fail to reenter the market at an ideal time. The result is during a downtrend most strategies effectively limit downside, but investors are stuck watching the market climb while they're waiting for their fund to catch up. At best these "Excel Formula" type strategies break even, often they lose out to their underlying security.

Perhaps RBS is the 0.1% that picked a working method, we'll examine their current progress later in this article.

School 2: Limit Downside on Short Plays

The unbiased amongst you could make the argument that School 1 is unfair and that RBS doesn't ever actually claim to "beat" its index, simply limit its volatility. Using this mindset investors might otherwise choose these funds if they suspect a short rally in their benchmark, but don't want to get blindsided by a sudden drop.

While this sounds compelling, don't forget all these funds are really doing is just tracking a moving average at a premium of up to 1%. Purchasing a Trendpilot ETN in a downtrend could mean the fund has already switched to cash, while the benchmark is continuing to become cheaper.

School 3: Cater To The Wary

Lastly there is probably a sizable niche of investors who would rather not watch their net investment drop 20% in 3 days. In this School I can find the most logic; RBS's funds provide investors with exposure to their favorite or advisor recommended benchmark, while reasonably ensuring they won't succumb to the mini-heart attacks inevitable of investing in equities and commodities.

This strategy could be a great selling point for those looking to leverage their risk, retirees in particular. However, as with School 1, should RBS's strategy underperform in the long run, School 3 would still be better off looking elsewhere to manage their risk.

To judge how RBS's strategies play out, we'll use an Annualized Percent Yield-to-Date methodology; this way we can see how these funds fared if an investor purchased them at any time since inception.


I choose to introduce TBAR first as gold has recently taken a plunge, resulting in TBAR being, at present, the better choice. However as the second image below shows if we look at the return of both these funds before the plunge they match up nearly perfectly. I fully expect when gold rises, TBAR will miss the trend and buy high, equalizing any gains.

As of 2013-04-28: (click to enlarge)

As of 2013-04-11: (click to enlarge)

TWTI vs. iPath S&P GSCI Crude Oil TR Index ETN (NYSEARCA:OIL)

Unlike TBAR which might appear to break-even with its benchmark TWTI has, at no time, kept pace.

TRND vs. iShares S&P 500 (NYSEARCA:SPY)

In the Large Cap arena RBS's TRND clearly mistimed its movements, yielding ~5% lower per year since inception than its rival ETF.

TRNM vs. iShares Core S&P MidCap ETF (NYSEARCA:IJH)

Perhaps it's correlation in the market, but RBS's strategy could not work for Mid-Cap stocks either, trailing iShares' rival benchmark by ~5%.

TNDQ vs. PowerShares QQQ (NASDAQ:QQQ)

TNDQ is a fairly recent offering from RBS so perhaps it hasn't had time to fully employ the strategy, however from the current data available it's the same story... underperformance.

TCHI vs. iShares MSCI China Index (NYSEARCA:MCHI)

Sadly TCHI is RBS's latest offering and the fund is not yet a year old; an apples to apples comparison isn't yet possible. However TCHI is currently underperforming MCHI by ~5%.


RBS's Trendpilot offerings are a somewhat first in the market to provide a fully transparent "active" management strategy in an ETN. While there are varied reasons for investors to want to choose these funds over their benchmark, I can safely say beating that benchmark should not be one of them. Perhaps there's some short play tactic I'm not familiar with, but from a fundamental buy and hold perspective RBS's strategy is junk. As to their point, I guess the expression holds true, "If you build it, investors will come."

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.