RBS' New Global Big Pharma ETN: Diversification Rules Be Damned

| About: RBS Global (DRGS)

RBS launched a new pharma ETN with ticker DRGS. It appears to be a large cap, global tracker similar in a lot of ways to many of the other health care sector ETPs. There are probably a dozen ETFs with large weightings in Bristol Myers (NYSE:BMY), Merck (NYSE:MRK) and the other usual suspects.

What is interesting about this fund, from a where is the industry going standpoint, is that the underlying index only has 16 components. The names held also include Glaxo (NYSE:GSK), client holding Novartis (NYSE:NVS), Abbott Labs (NYSE:ABT) and you've probably heard of all of the others.

The ETN wrapper apparently allows for fewer holdings than ETFs. I wrote an article about the Disk Drive ETNs recently which track an index with only eleven constituents. ETFs need to have at least 20 holdings and it appears that ETNs don't have this burden. There have been jokes before about single stock ETFs which are meant to take the specialization to an extreme.

I have no idea who needs another choice in global health care sector products but this does raise the possibility of the ETN wrapper offering access to themes or niches where there are not enough stocks for an ETF. Off the top, an ETN for Scandinavian banks or Chinese toll roads would offer non single stock access to relative health in the case of the former and relative non cyclicality in the case of the latter.

The big obstacle here is the ETN wrapper. ETNs are unsecured debt from the issuer. The banks that did not fail a few years ago are unlikely to be allowed to fail now but I don't know why anyone would take that on in the face of an alternative that does not take on this added element, and with healthcare there are of course many fund alternatives.

An ETN for some segment where there is no ETF for whatever reason becomes more plausible than what appears to be a me too product. The RBS' Trend Pilot funds offer a unique enough solution that some will be willing to take on the risk.

The other drawback is the dividend. Most ETNs do not pay a dividend. The 16 component index yields 3.3%. The ETN will not pay out a dividend however. The index will still capture the yield (probably 2.7% after accounting for the 0.60% expense ratio) but it will be reflected in the share price as if it was being reinvested. Not getting an actual payout is more of a psychological obstacle to overcome but it does need to be overcome to consider the product and obviously anyone taking income from their portfolio would need another wrapper that had an actual payout.