RBS targets advisers, managers with Gold Trendpilot ETNs linked to momentum-based index

By Kenneth Lim

Boston, Feb. 23 - Royal Bank of Scotland NV continued to expand its momentum-based Trendpilot suite of exchange-traded notes with a structured product linked to the price of gold.

"This isn't just giving a delta-one performance," one sellsider said. "This gives a downside risk-protection tool as well."

RBS recently sold $4 million of zero-coupon RBS Gold Trendpilot ETNs due Feb. 15, 2041 linked to the RBS Gold Trendpilot index.

The notes have a face amount of $25 each.

The index provides exposure to either the price of gold bullion or the cash rate, which is defined as the yield on a hypothetical notional investment in three-month U.S. Treasury bills.

If the price of gold bullion is at or above its historical 200-index-business-day simple moving average for five consecutive business days, the index will track the return on the price of gold bullion with no exposure to the cash rate until a negative trend occurs.

On the other hand, if the price of gold bullion is below the simple moving average for five consecutive business days, the index will then track the cash rate and will have no exposure to the price of gold bullion until the next positive trend.

As of the pricing date, the index tracks the price of gold bullion.

Investors will participate fully in any gain or decline in the underlying index. But they will also be charged an investors fee, which is 1% per year when the index is tracking the price of gold bullion and 0.5% per year when it is tracking the cash rate.

The notes trade on NYSE Arca, Inc. under the symbol "TBAR."

RBS Securities Inc. is the agent. Pacer Financial, Inc. is marketing the notes.

Momentum products

The product is the third Trendpilot offering by RBS, which has already launched ETNs based on the same methodology linked to the S&P 500 Total Return and S&P MidCap 400 Total Return indexes.

The Trendpilot indexes use an unusual methodology where they shift to cash once a negative trend has been established in the core underlying index, in a way replicating an investor who gets out of an investment once momentum turns negative.

But the indexes are also unusual because they offer a two-tiered fee structure. When the Trendpilot index is tracking cash, the fee is cut to 0.5% from 1%.

"The reason is ... if gold is in a perpetual bear market for years, we want to have a reduced fee," the sellsider said. "It's only fair to give investors a reduced fee in that situation."

The sellsider acknowledged that a 1% fee can be higher than some simple index trackers but noted that the trend-tracking mechanism offers a way to mitigate downside risk for investors in bear markets.

"It's bringing on a value add," the sellsider said.

Wide target group

The sellsider said the product is unique enough to not be competing directly with most other gold-related investment alternatives in the market, both in terms of its being linked to spot gold rather than futures as well as its methodology.

"I think it's creating a new segment of the market for investors who want asset exposure but are looking to mitigate risk," the sellsider said. "It's not competing against delta-one investments."

RBS retained Pacer Financial, a wholesaler, to market the product to its clients, which means that fund managers and registered financial advisers are potential customers.

The product is for "investors who have a long gold view but want an objective mechanism to exiting the market if we're entering a bear market in gold," the sellsider said.

Other products possible

The gold ETN came at a time when prices were near 30-year highs, so it managed to latch on to a sector that investors were already eyeing.

"I think it's important as gold is now approaching 30-year highs that investors have access to it," the sellsider said.

The sellsider said the Trendpilot methodology could potentially be expanded to other indexes and asset classes that also have "clear" market trends, are widely followed "and have minimal noise compared to other benchmarks."

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