UBS prices two ETracs linked to ISE Solid State Drive index for technology niche play

By Emma Trincal

New York, Sept. 15 -UBS AG, London Branch priced two new exchange-traded access securities in a bid to attract growth investors looking to get exposure to a "booming" segment of the technology market: solid state drives, or "SSDs," according to a market participant.

It is unusual for an ETN to be tied to such a narrow niche market, sources noted. But the market participant said that there is increasing demand for the newest forms of electronic storage.

"SSDs are a game changer for computing," he said.

UBS priced $10 million of 0% Etracs due Sept. 13, 2041 linked to the ISE Solid State Drive index, according to a 424B2 filing with the Securities and Exchange Commission.

Additionally, the bank priced $10 million of 0% monthly 2x leveraged ETracs due Sept. 13, 2041 linked to the ISE Solid State Drive index.

The notes are based on a total return index created last month by International Securities Exchange that provides a benchmark for investors interested in tracking up to 15 companies actively involved in solid state drives.

Fast, costly

Solid state drives are alternatives to hard drives that are gaining momentum as they eliminate one of the failure mechanisms of hard drives: moving parts.

They have other advantages as well, according to the market participant.

"They are more efficient and much faster than hard drives," he said.

"Unfortunately, it's so expensive to use SSDs today that right now, it's just used on high-end enterprise storage products. But as the cost ... comes down, you'll see it being used by everybody eventually.

"Now our PCs have hard drives, which are inefficient, slow and use a lot of energy. But soon, computers will no longer use disc drives; they'll use SSDs."

The index currently consists of 11 companies.

The top constituents, which, combined, make for half of the index in equal weightings, are Western Digital Corp., Seagate Technology, Fusion-IO Inc. and Ocz Technology Group Inc.

"The hard thing to do is to pick the companies that will do best," the market participant said.

"The idea behind the ETN is to buy the companies involved in commercializing the SSDs. If you get three out of that that become the massive winners, that's the idea. ..."

Robert Castellano, president of the Information Network, a research firm specializing in technology, said the new ETN was unique.

"I haven't heard of any product like this one before for investors following the sector," he said.

The solid state drive sector is one of the most promising, Castellano noted, but its growth faces hurdles.

"Cost is the key problem, that's why it's not cost-effective to be used in the PC market. Those devices may cost 100 times more than a hard drive," he said.

"So right now, the technology is used in enterprise systems, applications where people care about performance, high speed and not so much about cost."

As an example of an enterprise system, he mentioned the large computers and servers that are used to run the Nasdaq.

Tablet revolution

Those alternatives to hard drives are also used in consumer applications, he said, adding that iPods, MP3 players, smart phones and tablets are currently using solid state drives.

"The tablet market is huge. Apple this year sold 10 times more tablets than last year," Castellano said.

"The way the market is moving is toward portability and small size.

"I think this is not a bad investment idea."

Industry players themselves realize the potential of the sector, he noted.

Some of the top hard drive manufacturers are reinforcing their presence in the SSD market, he said, citing Seagate, which entered this year into a partnership agreement with Samsung Electronics Co., Ltd., a leader in digital consumer electronics.

"Seagate, one of the oldest makers of hard drives, sees the benefit of this new technology and is making the investments necessary to grow its presence in the sector," he said.

Granular

Sources said that narrow indexes are not that common as underliers of ETNs, especially in the technology sector.

But gaining access to a niche market is also why investors look into exchange-traded funds and ETNs, said Matt Medeiros, president and chief executive officer of the Institute for Wealth Management.

"The advantage is if you're interested in this sector, you can get exposure to it through a single Cusip."

"For someone bullish for this specific sector, that's great," said Steve Doucette, financial adviser at Proctor Financial.

"But for us, we'd probably not look at something so specific. Once you get more and more granularity, you're taking more of a bet and you may or may not have the right bet.

"Instead of investing in this niche market, we would probably have our technology allocation to a mutual fund manager or a broader index."

The request for the new product originally emanated from an institutional investor, a source said. But he said that both retail and institutional investors may be attracted to the concept.

"I think there will be a good interest for the product," he said.

Some financial advisers may look into technology as a macro play.

"I don't follow this niche market, but I believe that as companies rebuild after the decline of 2008, they'll begin to upgrade their technology prior to hiring back the employees they've laid off," said Medeiros.

"Technology is a very, very interesting play in general."

The index is calculated and maintained by Standard & Poor's based on a methodology developed by the International Securities Exchange in consultation with Standard & Poor's.

The non-leveraged ETracs and the 2x leveraged series were approved for listing on NYSE Arca under the symbols "SSDD" and "SSDL" respectively.

UBS plans to sell up to $100 million of each series of notes. The initial $10 million of notes for each series was priced at par of $25. The remaining $90 million for each series will be sold from time to time at varying prices.

UBS Investment Bank is the agent.

© 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.