HSBC offers Elements linked to commodity trends index; open-architecture gaining traction, advisor says

By Kenneth Lim

Boston, June 16 - HSBC USA Inc. became the latest issuer to offer a product based on the Elements exchange-traded notes platform with a commodities-linked security.

The HSBC offering gives investors an efficient way to gain exposure to a well-known commodity strategy, an investment advisor said.

HSBC offers ETN

HSBC launched a series of zero-coupon Elements exchange-traded notes due June 16, 2023 linked to the S&P Commodity Trends Indicator - Total Return index.

The notes will track the index. If the index ends higher than its initial level, investors will receive par of $10 plus 1% for every 1% increase in the index for each note, less an annual investor fee of 0.75%. If the index finishes lower, investors will lose 1% for every 1% decrease in the index and the investor fee.

The notes may be redeemed early, subject to a minimum principal amount of $2.5 million.

The notes will trade on NYSE Arca under the symbol "LSC."

The S&P CTI index applies a long/short strategy to six commodity sectors based on price movements over the previous seven months. A long position is taken when a sector's current price is equal to or greater than an exponential average of the past seven monthly price inputs. A short position is taken when the current price is less than an exponential average of the past seven monthly price inputs. The energy sector, however, will only have a flat position when a short position is indicated.

The product is the first by HSBC to be offered using the open Elements architecture, which is being sold by Nuveen Investments and Merrill Lynch & Co. Other third-party issuers who have offered Elements products are AB Svensk Exportkredit, Credit Suisse and Deutsche Bank.

The HSBC notes are also the first to be linked to the S&P CTI index.

Index has track record

The underlying index in the HSBC notes is a well-known commodities index that has displayed a good track record, an investment advisor said.

"The index has been around for more than 15 years, and it's been quite consistent, outperforming the benchmarks," the advisor said. "It's definitely not a brand new strategy that's being offered."

Linking to an index that has been around for some time and offering a simply one-for-one tracking structure may be a good way for HSBC to make its Elements debut, the advisor said.

"When it's the first time you're offering something, simpler is usually better," the advisor said. "Certainly there's going to be familiarity with the index in the market, so that might help lower any barriers in terms of concerns or uncertainties with new investors. And it's a really simple structure, so it's really easy to understand."

The product will likely appeal to investors who want to gain access to the underlying index, the advisor said.

"It could attract investors who want exposure to commodities and are looking to potentially outperform the major commodity benchmarks," the advisor said.

ETN structure still attractive

The advisor said ETNs continue to be attractive investment products.

"A lot of investment advisors like exchange traded products because it lets us control our exposure and our returns better," the advisor said.

"In terms of ETNs, I think a lot of times they're seen as alternatives to ETFs. A lot of the ETNs we're seeing are a lot like ETFs, but without the tracking errors and possibly better tax treatment, although as you know there's a bit of uncertainty there and nobody you talk to will give you a straight answer about these will be treated. Personally, I wish there were more ETNs available."

The advisor said ETNs work well with non-traditional underlying assets.

"The thing about the ETN is it creates liquidity and access in an asset that normally you'd have trouble getting," the advisor said. "It's really difficult to get into commodities, for example, in a way where you can know your exposure and adjust your position on a daily basis. This really opens doors for investors."

Open architecture gains steam

The advisor also noted that products based on open platforms like Elements could become more common as investors worry more about the risk of an issuer default.

"I think open architecture will take on a bigger presence," the advisor said. "A lot of investors now are, or at least they should, be concerned about the credit of the people issuing structured products. This might actually push some of the banks to embrace open architecture. If you're a bank with poor credit, getting third-party issuers lets you continue to make money off of this business. Even if you have a strong credit, open architecture helps your clients diversify their credit exposure."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.