ETNs tied to S&P 500 make market debut with Barclays pricing five ETN series for $875 million

By Emma Trincal

New York, Nov. 18 - Barclays Bank plc announced on Wednesday the launch of leveraged exchange-traded notes linked to the S&P 500 Total Return index on the NYSE Arca. For the first time investors will gain exposure to leveraged returns linked to the performance or inverse performance of the S&P 500 Total Return Index.

This index is calculated in the same manner as the S&P 500 but it takes into account the reinvestment of the dividend income from its underlying stocks.

"These are the first ETNs to give access to the leveraged returns and inverse leveraged returns of the U.S. equity market," said Philippe El-Asmar, managing director, head of investor solutions at Barclays Capital.

The launch includes five ETNs:

• Long B leveraged ETNs with the symbol "BXUB";

• Long C leveraged ETNs with the symbol "BXUC";

• Short B leveraged ETNs with the symbol "BXDB";

• Short C leveraged ETNs with the symbol "BXDC"; and

• Short D leveraged ETNs with the symbol "BXDD."

Barclays priced $125 million for each of the three following series - Long B, Short C, and Short D.

The bank priced $250 million of the Long C series and $250 million of the Short B issues.

In total, the bank priced $875 million.

First Leveraged ETNs

Several exchange-traded funds linked to the S&P 500 or to its inverse performance have already gained popularity in the market. The reasons for the lack of an equivalent ETN product are not clear, said a sellsider. "But this is definitely the first one."

One possible explanation could be the relative reliability of the existing ETFs that track the S&P 500, some sources suggested. Since ETNs are often used as a remedy for ETFs' tracking errors - which often lead to underperformance - the need for ETNs referencing the S&P 500 may not have been as pressing with this underlying as it may be for other indices or asset classes that are far more illiquid.

"The tracking error of ETFs linked to the S&P is probably very, very small because the index is very easy to replicate. So there is less of a need for ETNs linked to the S&P," said El-Asmar.

"However, the one we launched is not linked to the S&P 500. It is linked to the leveraged return and inverse leveraged return of the S&P 500."

Competing with ETFs

The main competitor for the new ETNs is ProShares UltraShort S&P 500, said Marc Gerstein, research consultant with Portfolio 123.

However, the Barclays ETNs offer an advantage over ProShares, he noted.

"ProShares does not really compete because it's two-times leverage while this one can give you three-times," Gerstein said.

Gerstein said that the only ETFs exposed to the U.S. large cap stock market that features an equivalent triple leverage was Direxion Daily Large Cap Bull and Direxion Daily Large Cap Bear ETFs, both linked to the Russell 1000 index. However, none of those products reference the S&P 500, he said.

"If you really want the S&P 500 and a triple level of leverage, then the Barclays would be the one," said Gerstein.

"Personally, if given the choice I would rather go with an ETF because I don't want the credit risk associated with ETNs. And if I wanted the three times leverage, I would be satisfied with the Direxion ETF because I am not particularly interested in the S&P. But most people are, and these ETNs could be very handy for portfolio managers or investors seeking a way to hedge the S&P 500. They could really use that type of product."

Menu of choices

One of the advantages of the series is that it is a "good mix of views," giving a "menu of choices" to the investors, including long, leveraged long and leveraged short access to the S&P 500, said a market participant.

"The Barclays [ETNs] were designed to provide transparent investment solutions to sophisticated investors who have a strong directional view of the market and, specifically, of the performance of the index," said El-Asmar.

"We think these ETNs will be more trading tools rather than buy-and-hold investments as ETNs are traditionally used by our clients," he said.

Barclays said the primary features of the notes are a leveraged return, a fixed maturity date, a stop-loss mechanic resulting in automatic early redemption and an optional redemption feature for holders. The notes track a fixed multiple of the performance of the index over the term of the notes, before the deduction of some costs and fees.

More to come

"Today's launch is the first in a series of leveraged ETNs that we plan to develop and link to other equities indices and asset classes," El-Asmar said. He declined to be more specific on the timing and the details of the future offerings.

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