Barclays to launch short, long and leveraged ETNs tied to S&P: Deal is seen to fill a void

By Emma Trincal

New York, Nov. 13 - Barclays Bank plc plans to price several leveraged exchange-traded notes tracking the long and short performance of the S&P 500 Total Return index return, an offering, sources said, that should be welcomed by the market as it fills a void.

"There is no ETN out there with that underlying so it has the potential for success," said Michael Johnston, founder and senior analyst at ETF Database.

In a series of 424B3 filings with the Securities and Exchange Commission, Barclays announced five different offerings, two of which are long the S&P 500 index and three others exposed to the reverse performance of the index.

Long, short and leverage

Barclays plans to price two versions of 0% long leveraged ETNs due 2014 linked to the S&P 500 Total Return index. Series B will offer three times leverage while series C, two times.

The total return version of the S&P 500 Index is calculated in the same manner as the S&P 500 Index, except that it takes into account not only changes in the prices of the stocks but also the reinvestment of the dividend income from its underlying stocks.

On the short side, Barclays plans to price 0% short leveraged ETNs due 2014 linked to the S&P 500 total return index. The leverage ratios are one times, two times, and three times available in three distinct series called respectively B, C and D.

No such thing

Sources said that the new products are newsworthy since there is no ETN linked to the S&P 500 currently available to investors in the market. This situation contrasts with the ETF universe which offers an abundance of products referencing the U.S. stock benchmark.

Barclays' line of products, classified under the brand iPath for ETNs and iShares for ETFs offers the iShares S&P 500 Index, an ETF trading under the "IVV" ticker. But there is no leveraged or short version for this product.

Going after ProShares

"They're going after the ProShares products. They're initializing it to see how that goes," said a structurer at another bank who has heard of the new launch. "Will it beat the ETF? You never know until it starts trading."

ProShares UltraShort S&P 500 is one of the largest ETFs that offer a short exposure to the S&P 500 index. It aims to pay twice the inverse performance of the index.

Niche offering

Barclays may also expect to plug a hole with the long series of its upcoming issues: ETNs tracking the S&P 500 are said to be non-existent, according to several sources.

For some, among the skeptics, the lack of ETN products linked to the S&P is easy to understand.

"There are no ETNs linked to the S&P because you have a very liquid underlying," said Tom Lydon, president of Global Trends Investments. "There is really no need for an ETN with the redemption being so easy and the stocks representing the S&P index being so liquid."

Others tend to think that ETFs are more appropriate for equity investors as they give investors a stake in the underlying without credit risk exposure.

"I don't understand why there is a need for it. An ETN buyer is an unsecured creditor of the brokerage firm whereas the ETF is a fund that actually has the assets in the fund. With the ETF, the investor gets a claim on the stocks of the S&P 500. With an ETN, the claim is on the broker-dealer," said Don Fishback, president of Fishback Management & Research.

Fishback added that for this reason, he tends to buy the ETN only when the equivalent ETF is unavailable. "Obviously it's not the case with the S&P," he said.

Credit risk versus errors

But many investors make the choice between ETFs and ETNs based on other factors.

"ETNs give you access to hard-to-reach markets such as emerging markets and commodities. Often, it also boils down to making a choice between credit risk and tracking errors," said a sellsider.

Johnston said that the new ETNs probably "could offer an advantage" over the ETF because "notes in an ETN are directly linked to the underlying index while ETFs in general have tracking problems."

But some analysts said that it is questionable whether there is a tracking error problem with the S&P 500 index.

"With an ETN, the obligation is to mirror the index so you can have a high confidence that the tracking will be good," said Lydon. "It's very creative but I'm not sure it's needed because frankly there haven't been tracking problems with the S&P 500. The ETF tracks the index very closely."

Bright future

Overall though, there seems to be a need for a new ETN tracking the S&P even among the most skeptical investors or experts.

"I think it could be very successful," said Johnston.

"If they [Barclays] can solve the tracking error, I would be pleasantly surprised and it would definitely fill a void. I don't know if they can but I'd give them a try," said Fishback.

"The ETN structure is an innovative way to produce the leverage and inverse returns without the risk of the daily resets," said Richard Keary, principal at Global ETF Advisors, a New York consulting firm. "Once these products are in the market and show that they perform well my guess is that they do become very popular."

A spokesperson at Barclays declined to comment.

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