UBS launches two income-yielding 2x leveraged ETNs due 2042 to compete with dividend ETFs

By Emma Trincal

New York, May 23 - UBS AG, London Branch tapped into investors' yearning for yield with two new exchange-trade notes each linked to two different blue-chip dividend indexes. The ETNs offer for the first time a leveraged exposure to those indexes.

"Enhanced yield potential and monthly distributions are key differentiators of our latest ETracs offering," Chris Yeagley, UBS managing director and U.S. head of equity structured products, said in a company press release. "Yield-oriented investors now have access to these innovations in convenient exchange-traded securities."

UBS priced $10 million of monthly pay 2x leveraged exchange-traded access securities due May 22, 2042 linked to the Dow Jones U.S. Select Dividend index, according to a 424B2 filing with the Securities and Exchange Commission.

The index tracks the performance of 100 stocks selected by dividend yield, subject to screens for dividend-per-share growth rate, dividend payout ratio and average daily trading volume.

Separately, UBS priced $10 million of monthly pay 2x leveraged ETracs due May 22, 2042 linked to the S&P High Yield Dividend Aristocrats index, according to a 424B2 filing with the SEC.

The index measures the performance of the 60 highest dividend yielding S&P Composite 1500 index constituents, which have followed a managed-dividends policy of consistently increasing dividends every year for at least 25 consecutive years.

Leverage

Both notes offer two-times leveraged exposure to the index less fees.

"This is the main thing about those products. There is no dividend ETF out there that offers leveraged exposure to these indexes," a market participant said.

For each series, UBS plans to sell up to $100 million of the notes. The initial $10 million of notes priced at par of $25. The remaining $90 million will be sold from time to time at varying prices, according to the SEC filings.

"This is the first exchange-traded product to offer leverage on a dividend-paying stock index," said Michael Johnston, founder and senior research analyst at ETF Database.

Income, monthly reset

Another attractive factor is the income potential in the form of variable monthly coupons linked to 2 times the dividends, if any, on the index constituents.

"There will be a lot of interest for these products, I'm sure. Investors are so eager to find meaningful yields given that Treasury yields pay nothing. It will be used as an income replacement product," Johnston said.

"These will be the only monthly distribution products on dividends out there," the market participant said.

Johnston said that another distinguishing factor between the new products and most other leveraged ETFs is the monthly leverage resetting.

"Most leveraged ETFs reset daily. These new ETNs have a lower frequency reset, which means you're not impacted as much on the compounded return," he said.

Inverse and leveraged ETFs with daily compounding are known to cause tracking errors, making them more appropriate for short-term traders than investors, he explained.

Cheaper

The payout at maturity will be the current principal amount times the index factor minus the accrued fees, which are accrued tracking fees and an accrued financing charge.

"Interestingly, those new ETNs are cheaper than the ETFs by 5 basis points," Johnston said.

The 2x leveraged ETracs linked to the Dow Jones U.S. Select Dividend index began trading on the NYSE Arca under the symbol "DVYL" on Wednesday.

The ticker symbol is derived from the ETF tracking this index, the Dow Jones Select Dividend index fund, which is listed on the NYSE Arca under "DVY."

The 2x leveraged ETracs linked to the S&P High Yield Dividend Aristocrats index also made their debut on the NYSE Arca on Wednesday and are listed under "SDYL."

Their symbol also comes from the ETF tracking this index, the SPDR S&P Dividend ETF, which is listed on the NYSE Arca under "SDY."

The accrued tracking fee is 0.35% a year for the DVYL ETN and 0.3% a year for the SDYL ETN.

The accrued financing charge is the same for both products at Libor plus 40 basis points.

In comparison, the expense ratio for the DVY ETF is 0.4%. It is 0.35% for the SDY ETF.

"I think they'll get to their $100 million target rather quickly. I can see demand from both retail and institutional money. It may be higher risk because of the leverage, but I see those products appropriate for both," said Johnston.

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