By Dennis Hudachek
RBS hopes its new commodities ETNs based on roll-optimized Rogers RICI indexes will take off.
[This article originally appeared on IndexUniverse.com and appears here with permission.]
The Royal Bank of Scotland (RBS), the issuer behind the Trendpilot series of ETNs, is nearing launch of five new ETNs, all based on renowned commodities guru Jim Rogers’ Enhanced Rogers International Commodity Index (RICI) series.
Aside from a broad commodity ETN based on Rogers’ flagship-enhanced RICI index, the four other ETNs will track RICI subindexes focused on agriculture, energy, precious metals and industrial metals.
Jim Rogers’ fans should be excited. After all, Rogers is to commodities what Bill Gross is to fixed income. With most investors I know, when Rogers talks commodities, they listen.
And to those who follow Rogers, you can’t ask for a better index. Rogers handpicks and weights commodities he thinks are poised to do well over the long haul, based on global demand and liquidity.
While these ETNs based on Rogers’ enhanced RICI series have been trading in Europe for several years, these enhanced index series are now making their debut in the U.S.
The NYSE said last week they would launch on Tuesday, Oct. 30, but Hurricane Sandy interrupted those plans. It’s not clear when exactly they’ll be rolled out, but suffice it say it’s more or less imminent.
The five new ETNs now in the loading dock are as follows:
- RBS Rogers Enhanced Commodity Exchange Traded Notes, a broad, multicommodity ETN that will trade under the symbol RGRC
- RBS Rogers Enhanced Agriculture Exchange Traded Notes, which will trade under the symbol RGRA
- RBS Rogers Enhanced Energy Exchange Traded Notes, which will trade under the symbol RGRE
- RBS Rogers Enhanced Precious Metals Exchange Traded Notes, which will trade under the symbol RGRP
- RBS Rogers Enhanced Industrial Metals Exchange Traded Notes, which will trade under the symbol RGRI
Taking On Contango
Here in the U.S., Merrill Lynch’s Elements brand carries ETNs based on RICI indexes, but they’re based on first-generation RICI indexes, which roll contracts over monthly — what we call a “front-month” rolling strategy.
The problem with this strategy is that if the commodity has been in steep contango, the negative roll yield can significantly eat away at the fund’s returns over time. As many investors are starting to learn about commodities funds, commodity exposure is only one component, with roll-yield being the other.
The new enhanced RICI series are second-generation indexes that aim to optimize their contracts on the futures curve; that is, to mitigate the effects of contango. For example, roll dates might be selected based on seasons and harvest schedules, depending on the commodity.
Besides the enhanced-roll feature, which will distinguish the RBS ETNs from the current Elements suite, the other notable issue to consider is counterparty credit risk. Since these products are structured as ETNs, they do come with issuer credit risk.
For Elements RICI ETNs, the credit risk is the Swedish Export Credit Corporation. For these new RBS ETNs, the issuer and credit risk belongs to the Royal Bank of Scotland.
Rogers’ Commodities Outlook
While Rogers is bullish on commodities in general, currently he seems to be the most bullish on agriculture.
Here we have five-year charts of the enhanced RICI broad commodity and agriculture indexes, which the new ETNs will track compared with the original RICI broad and agriculture indexes, which are tracked by the Elements Rogers International Commodity – Total Return ETN (RJI) and the Elements Rogers International Commodity – Agriculture Total Return ETN (RJA), respectively.
As you can see, the enhanced RICI indexes performed exceptionally well, outperforming the first-generation indexes over a five-year period.
The next big question is whether investors will take to these new, more complex indexes.
Based on historical returns, these optimized indexes look to be superior products to the first-generation, front-month rolling indexes.
Jim Rogers also has quite a following in the commodities space.
Of the 11 Elements ETNs currently trading, the top four by assets are RICI-based ETNs, with RJI and RJA accounting for over $1 billion of the Elements’ $1.23 billion in total assets.
Still, RBS might have some work ahead of it.
Specifically, I’m thinking of iPath, which in April 2011 launched optimized versions of its existing series of first-generation commodity ETNs. Currently, those 19 optimized “Pure Beta” iPath ETNs are collecting dust with little to no assets.
It’ll be interesting to see if investors shift some of that $646 million in assets out of RJI into the new RGRC or the $394 million from RJA into the new RGRA.
RBS has struggled somewhat with its suite of ETNs in the U.S. thus far, with total assets of $198.7 million among eight ETNs. Its most successful strategy, the RBS U.S. Large Cap Trendpilot ETN (TRND), has amassed just $85 million in assets.
Perhaps this new suite of RICI ETNs can reignite or jump-start RBS’ U.S. ETN business.
I think it’s a real possibility.
Still, for that to happen, RBS needs convince investors of the true benefits and superiority of these products compared with the existing Elements products.
Disclosure: At the time this article was written, the author held a long position in RJA.