Credit Suisse's new 2x ETNs linked to Stoxx Europe 50 seen as bet on European turnaround

By Emma Trincal

New York, Sept. 5 - Credit Suisse AG, Nassau Branch launched a new exchange-traded note that provides two-times leveraged exposure to 50 European blue-chip stocks. Sources said the notes are meant to capture investors' bullish sentiment on European equities as more investors seek to express a view on the European recovery.

Credit Suisse will issue up to $200 million of 0% Credit Suisse FI Enhanced Europe 50 ETNs due Sept. 10, 2018 linked to the Stoxx Europe 50 UDS (Gross Return) index, according to a 424B2 filing with the Securities and Exchange Commission.

The agent, Credit Suisse Securities (USA) LLC, announced that it would sell a portion of the ETNs at par of $100 on Thursday, the inception date. The remainder will be sold from time to time at varying prices.

The ETNs are designed for investors who seek a leveraged return linked to the performance of 50 of the largest European companies.

The Stoxx Europe 50 index is composed of 50 European blue-chip companies selected from within the Stoxx Europe 600 index, which contains the 600 largest stocks traded on the major exchanges of 18 European countries.

Dividend benefit

The underlying index differs from the more commonly used Euro Stoxx 50 index as it tracks the performance of European companies while the Euro Stoxx benchmark's coverage is limited to the eurozone.

The Stoxx Europe 50 index is a gross return index, reflecting both price performance and dividends. The annual dividend yield on the Stoxx Europe 50 index is about 3.4%.

"Getting the dividend in this note is a nice plus," said Steve Doucette, financial adviser at Proctor Financial.

"The dividends reduce the volatility of the product," said Christian Wagner, chief executive officer at Longview Capital Management, LLC.

Jim Delaney, portfolio manager at Market Strategies Management, said that it is always good to see new products, especially on this index, which is not widely used in exchange-traded products.

"An ETN is a different kind of investment. It can be very helpful for a fixed-income investor who wants exposure to the European equity market. You put it in a bond. It opens up this market to a different kind of investor. This is the way you get that exposure without violating your charter," he said.

"There seems to be only one equivalent ETN out there, at least to my knowledge," he added.

He mentioned the Barclays ETN+ FI Enhanced Europe 50 ETN, which also offers a two-times leveraged participation in the performance of the Stoxx Europe 50 USD (Gross Return) index.

"On the ETF side, you have a couple, but I don't know if any of them offers the leverage," he said.

One of those ETFs is the SPDR Stoxx Europe 50 fund, which is tied to the Stoxx Europe 50 index. Another, the SPDR Euro Stoxx 50, is tied to the eurozone benchmark. Both products are unleveraged.

The case for bulls

Sources said that they are mostly familiar with the Euro Stoxx 50, an index of choice for investors betting on the recovery of the eurozone.

"We have a lot of pricing on the Euro Stoxx," a structured notes sellsider said.

"For regular structured notes, pricing is good due to the big dividend.

"If you look at the performance, the S&P is up 16% while the Euro Stoxx is up 5%.

"Many see that the full recovery in Europe hasn't happened yet, and they are expecting Europe to come back strong.

"During the crisis, Europe and the U.S. took a hit while emerging markets rallied. Everybody was putting money in emerging markets. That was the way to go. Now we're seeing a reverse of that trend. Emerging markets are facing major capital outflows. The money is going back into the U.S. and Europe. With this flow of cash, European companies are distributing dividends, so there is a play on dividends in this market as well as a bet on growth, and that's why we're seeing a bullish trend around Europe right now."

"Conceptually, the Euro Stoxx and EAFE markets have been underperforming the S&P 500. If you're bullish, it's a great way to get exposure to the European stock market," Doucette said.

The term "EAFE" refers to the MSCI EAFE index, a stock index that replicates the performance of developed markets outside of the United States and Canada. This index has more than 50% of its holdings in European companies.

Fees

One drawback with the ETN is the fee structure, sources said.

"The fees do seem complex to me," Delaney said.

Investors are exposed to a set of expenses including the investor fee, the exposure fee and a rebalance fee, according to the prospectus.

On any day, the investor fee equals the product of the closing indicative value as of the previous business day times 0.05% times the day count fraction, which equals the number of calendar days from and including the previous business day to but excluding the current business day divided by 360, according to the prospectus.

The exposure fee equals the product of the index units as of the previous business day times the financing rate (Libor plus 76 basis points) as of the most recent quarterly reference date.

The rebalance fee is 0.05% times the closing level of the index on the rebalance date times the difference between the index units on the trading day immediately preceding the rebalance date minus the index units on the rebalance date. If the current business day is not a rebalance date, the rebalance fee is zero.

"They make it so difficult for people to understand," Wagner said.

"The expenses on ETNs can be complex. Anyone who wishes to invest in these products needs to do the diligence to study the fees and see if they are reasonable," Doucette said.

"The fees are fairly high. You run into that with leveraged ETNs, but investors have the benefit of getting paid dividends," Wagner said.

Leveraged exposure

Leveraged ETNs can be appealing for bulls, but they also come with drawbacks, some sources said.

"If you like European stocks and you're a bull, getting the leveraged exposure is great. But remember, two-time leverage works both ways. Leverage is sometimes dangerous if the market turns the other way," Doucette said.

Wagner said that with leveraged ETNs, the frequency of the leverage reset is important. The notes offer a quarterly reset, according to the prospectus.

"If an issuer doesn't reset on a regular basis, the leverage is going to be compounded and you'll start to see that your return is not going to reflect the underlying," Wagner said.

"It's particularly problematic with volatility indexes and not as important with underlying equities. But when it happens, the investor needs to revisit more regularly the product, keep track of the performance and check the allocations to eventually rebalance the portfolio. These reset factors can skew the performance significantly, particularly in downward markets," Wagner said.

"The quarterly reset makes it a little bit easier, although it's not as frequent as a daily reset," he added.

Caution

While more investors believe that Europe is recovering from a recession that lasted nearly two years, not everyone has turned bullish on this region of the world.

"Europe is a risky market. It doesn't take much to rattle the market, another shoe to fall, France, Italy, Spain whatever it may be," Wagner said.

"European equities are performing pretty well, not as well as the S&P 500, but it looks like the situation in Europe is turning around and that the index has still room to run up. That's why they did the new product," Delaney said.

"However, I'm still more bullish on the U.S. We are ahead in the recovery and will stay ahead for some time. The U.S. is at the acceleration stage, whereas Europe has not really turned the corner yet," he said.

Concentration risk

Other investors suggested that the exposure to the Stoxx Europe 50 or an equivalent such as the Euro Stoxx 50 could generate risks, in particular the concentration of an index made of only 50 holdings.

"I wouldn't invest in this underlying," Wagner said.

"I would choose a low-volatility ETF instead. I would prefer to get some dividends as a way to reduce volatility.

"Sometimes people look for eurozone exposure through the EAFE index. It's not a good choice. They forget that Japan represents 22% of the index."

Instead, Wagner said that he would prefer investing in the PowerShares S&P International Developed Low Volatility Portfolio ETF. The fund tracks the price and yield of the S&P BMI International Developed Low Volatility index, which comprises the 200 least volatile stocks of the S&P Developed ex. U.S. and South Korea LargeMidCap BMI index. European stocks represent at least 31% of this index.

"I would have no credit risk, no leverage and still get the dividends," Wagner added.

Another preferred choice for Wagner would be the Vanguard MSCI Europe ETF.

"I would use it instead because it's much more diversified," he said.

The ETF is tied to the FTSE Developed Europe index, which is made up of 497 stocks of companies located in 17 European countries.

Credit Suisse plans to list the ETNs on the NYSE Arca under the symbol "FIEU."

The 18 countries represented in the Stoxx Europe 50 index are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

The notes will be putable at any time, subject to a minimum of 10,000 notes.

The notes will be callable at any time, and they will be automatically redeemed if the intraday indicative value falls to 40% of the initial indicative value or, after any rebalance event, 40% of the rebalanced indicative value.

The Cusip number is 22542D100.

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