Morgan Stanley launches Russia ETF-linked products; Deutsche targets all investors with agriculture ETNs

By Kenneth Lim

Boston, April 16 - Morgan Stanley launched a couple of products linked to the rarely used Market Vectors-Russia exchange traded fund on Wednesday.

Meanwhile, Deutsche Bank AG, London Branch said its new exchange-traded notes linked to an agriculture index are designed to attract a wide spectrum of investors and could take some assets away from its own exchange-traded fund.

Morgan Stanley links to Russia

Morgan Stanley plans to price two series of notes linked to the Market Vectors-Russia ETF.

The first series comprises 10% to 12% reverse convertibles due Oct. 28, 2008 with a trigger level at 75% of the initial share level. The coupon will be set at pricing.

If the underlying share price falls below the trigger level during the life of the notes and finishes below its initial level, the payout will be a number of shares of the ETF equal to par of $1,000 divided by the initial share price. Otherwise the payout will be par.

The second product is a series of zero-coupon performance leveraged upside securities (PLUS) due May 2009.

Investors will receive par of $10 plus three times the percentage increase in the underlying share price at maturity, capped at a maximum payout return of 20% to 21%. Investors will lose 1% of their principal for every 1% decline in the underlying share price.

The Market Vectors-Russia ETF seeks to replicate the price and yield performance of the DAXglobal Russia+ Index, which is made up of a stock basket of the 30 most heavily traded Russia-based companies that are listed in Russia and on global exchanges.

"I don't think I've seen anything linked to this particular fund," an investment adviser said. "You don't usually see Russia on its own; it's usually part of a group like BRIC. We've seen a number of notes linked to BRIC currencies ... It might be someone wanted some exposure to Russia and asked Morgan Stanley to come up with something, or someone at Morgan Stanley figured the market was interesting enough on its own."

The adviser said the accelerated notes seemed at first glance to have a generous upside, but cautioned careful consideration of the risks.

"All you need there is for the fund to go up by 7% or just under that and you've reached the limit, so you could be looking at 20% return in a year," the adviser said. "That's not a bad return by most standards. But when you look historically, the fund has come up more than 20% over the past year, so if that continues you actually lose out compared to a direct investment. There's also no principal protection, so if the bullish view is the wrong view to take, you'll lose money. You really got to understand what you're getting into with this."

Deutsche ETNs aim at all investors

Deutsche Bank's newly launched agriculture-linked exchange-traded notes are aimed at a wide spectrum of investors and could take some assets away from the issuer's existing exchange-traded funds, said Deutsche Global Markets Investment Products managing director Kevin Rich.

"There are so many different investors out there with so many different needs, so we're offering all these different strategies," Rich told Prospect News.

Deutsche Bank on Tuesday unveiled four series of 30-year ETNs linked to the Deutsche Bank Liquid Commodity Index - Optimum Yield Agriculture index.

The products are the DB Agriculture Double Short, DB Agriculture Double Long, DB Agriculture Short and DB Agriculture Long exchange-traded notes.

The payout for each of the notes upon maturity is the principal amount multiplied by the applicable index factor on the final valuation date less an annual fee of 0.75%.

The index factor for the Double Short notes is double any decline in the underlying index. The Double Long notes have a factor of double any increase in the underlying index, while the Short and Long notes will track the underlying index.

The Double Short notes trades on NYSE Arca under the ticker symbol "AGA." The Double Long notes trades under "DAG," the Short notes under "ADZ" and the Long notes under "AGF."

The underlying index combines the returns of the Deutsche Bank three-month T-Bill Index and the Deutsche Bank Liquid Commodity Index - Optimum Yield Agriculture Excess Return. The agriculture component index is designed to reflect the price changes in a basket of corn, soybeans, sugar and wheat futures.

"We've been seeing an enormous amount of interest over the last several months," Rich said of the agriculture sector. "We have an ETF, [the Powershares DB Agriculture Fund] DBA, with over $2 billion in assets, so a lot of people are looking at the sector and seeing a very bullish environment right now."

"Many investors are very bullish on the sector, they are interested in the long notes," he added. "Some of them want to take a leveraged approach, and they can do so with the double long notes. We're also hearing from other groups of investors who think that it's overshot, these investors can buy the short notes."

Rich acknowledged that the notes could draw some assets away from the DBA fund.

"Sure it could," he said. "In fact, DBA is a one-time long, and we also have AGF, which is the long note, and the performance of those two products should be very similar."

Some investors like the note structure better than the fund structure, Rich explained. Investors who are concerned about tracking error and liquidity may find the notes preferable.

"ETNs are great for buying and holding, and are very transparent," he said.

Ultimately, Deutsche is trying to accommodate every investor, Rich said.

"There are so many different investors out there with so many different needs, so we're offering all these different strategies," he said. "All types of investors are interested in our products. When we first brought our ETFs to market, we thought interest would be mostly retail, but then we found some institutional size coming through ... some mutual funds who will buy our ETFs to get exposure to agriculture."

Rich expects the market for commodity-linked notes to continue to grow.

"I think for a long time commodities have been underserved as an asset class ... There are probably only a handful of issuers in this space right now, and we're just seeing the beginning of the growth of these products," he said.

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