By David Berman
If you are growing concerned about the incredible spikes by Internet-related stocks on their first day of trading, and whether it points to another bubble, this is going to send you over the edge: UBS has created two exchange-traded notes to give investors exposure to new stocks in the sector – and one of them gives leveraged exposure.
The ETRACS Internet IPO (EIPO) ETN follows a UBS index of 20 social networking, Internet software and Internet services stocks that began trading on either the New York Stock Exchange or the Nasdaq within the past three years. The Monthly 2xLeveraged ETRACS Internet IPO (EIPL) ETN goes a step further, providing twice the monthly change in the same group of stocks.
The index was created on July 7 and so doesn’t yet include the latest phenom: Zillow Inc. (Z), the online real estate listings service, began trading on Wednesday. The shares surged to a high of $60 at the start of trading – triple the IPO price of $20. They have since settled back.
However, the index is topped by LinkedIn Corp. (LNKD), the networking site that went public in mid-May and also surged on its first day of trading, raising alarms about the prices investors were willing to pay for the latest generation of Internet-related stocks. Yandex NV (YNDX), the Russian search engine, and OpenTable Inc. (OPEN) also make the top 10 list of holdings. The index will be rebalanced once a month.
While the appearance of these two ETNs might raise alarms among some investors, they actually might provide some much-needed relief to an area of the market where too much demand has been met with too little supply. In the case of both LinkedIn and Zillow, the companies floated a relatively small number of outstanding shares in their IPOs (in Zillow’s case, the IPO consisted of just 3.5 million shares). When large numbers of investors moved in on the shares, the prices rose dramatically partly because their was a shortage.
With ETNs, investors will be given another way to invest, potentially relieving some of these shortages. Presumably, the ETNs will also make it easier for bearish investors to bet against these high-flying stocks, because they can sell the ETNs short – or borrow the notes, sell them in the open market and hope to buy them back later at a lower price.
As for investing in the leveraged ETN, though, it seems designed for short-term traders who have stomachs of steel – and might be playing with other people’s money. These stocks are volatile: In its two months as a publicly traded stock, LinkedIn has already tripled, then fallen by 50 per cent, then risen 70 per cent.