UBS' Internet IPO ETNs aimed at capturing early growth of internet software, social networking

By Emma Trincal

New York, July 21 - UBS AG, London Branch priced two new series of exchange-traded access securities (ETracs) providing exposure to the performance of the UBS Internet IPO index, a new benchmark for up-and-coming internet stocks.

One of the series offers no leverage, the other a leverage factor of two.

"Investors now have the ability to gain either unleveraged or leveraged exposure to a portfolio of internet-related companies that have gone public within the last three years, all by way of two convenient exchange-traded securities" Christopher Yeagley, UBS managing director and U.S. head of equity structured products, said in a company press release.

Innovation

The UBS Internet IPO index, created earlier in July, is a total return index tracking the performance of at least 15 internet-related companies listed on the New York Stock Exchange or Nasdaq that have gone public within the last three years.

The top 10 holdings as of July 7 are LinkedIn Corp., HomeAway Inc., Yandex NV, Rackspace Hosting, Inc., Pandora Media Inc., Renren, Inc., OpenTable, Inc., Ancestry.com, Inc., SouFun Holdings Ltd. and Demand Media, Inc.

The index is a proprietary index of UBS calculated by Standard & Poor's and rebalanced monthly.

"This is the first index of its kind and so the first note with that type of exposure. There's not even an [exchange-traded fund] equivalent," a market participant said.

A financial adviser said that he has not seen new products tackling internet IPO stocks since the late 1990s.

The tech IPO sector has been on hold for a while but has begun to rebound recently, he noted.

"It's a sign that the appetite for internet stocks and IPOs is back," Matt Medeiros, president and chief executive officer at the Institute for Wealth Management.

"The technology group as a sector is still doing quite well. Certainly the internet as a component of that sector is getting a lot of attention as people are turning to the internet for their social connection and entertainment."

No old names

The index may offer exposure to very recent IPOs.

"As new internet-related companies go public, investors in these ETNs will gain exposure to them within weeks after their IPOs, provided they meet certain market capitalization and other eligibility requirements," Yeagley said in the release.

Two companies included in the index had their IPOs in May: Renren, the Chinese social network viewed as the equivalent of Facebook in China, and LinkedIn, the professional social networking site.

"Even older companies are still recent players because they've been public for less than three years," said the market participant.

"You're not going to get the Amazon or the eBay. You'll always have a fresh index."

Sources said that the product was launched as a result of two factors: investor requests and the difficulty in gaining access to this new generation of internet stocks.

"If I was looking for emerging growth opportunities, this type of note would be very appealing," Medeiros said.

Web 3.0

"There's a great deal of interest for what's called Web 3.0," the market participant said.

In Web jargon, the concept of Web 2.0 designates user-generated content such as blogs, and the term Web 3.0 refers to social media-related businesses.

"One of the challenges of investors trying to get into the field is that it's hard to choose which one, two or three internet companies are going to be the stars in the next two or three years," the market participant said.

"The idea behind this basket is to get exposure to all of them and benefit from those that do well."

Risk exposure is relative to the type of investment used before.

"This product gives you less volatility than if you invested directly into an individual internet stock or in the IPO," the market participant said.

"But it will generate more volatility than investing in another sector or investing in internet companies that have been around for a longer period of time."

Short squeeze remedy

For institutions such as hedge funds, the repercussions of the new ETNs may be positive, especially for borrowers of the underlying stocks, explained a derivatives trader.

"Those internet stocks are pretty difficult to borrow, which can create a short squeeze, a problem for the short-sellers, the hedge funds, for instance," he said.

"These ETNs may add liquidity into the system.

"The bank will be long the securities in their proprietary book and hedge the note. They can lend out those stocks and facilitate the job of the short-sellers, which is not a bad thing in itself."

The fees for the new products are seen as modest.

The tracking fee is 0.65% per year; the redemption fee is 0.125%; and for the leveraged series, a financing fee applies, which is Libor plus 40 basis points.

"For this particular sector, if you were to buy a similar objective, you'd be looking at twice as much on cost with a mutual fund and you would still have the typical margin expense for leverage. So I think it's pretty reasonable," said Medeiros.

Inception

UBS on Thursday priced $10 million of 0% Internet IPO ETracs due July 19, 2041 linked to the index as well as $10 million of 0% Monthly 2x Leveraged Internet IPO ETracs due July 19, 2041 linked to the same index, according to a 424B2 filing with the Securities and Exchange Commission.

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

The notes began trading Thursday on NYSE Arca under the symbol "EIPO" for the non-leveraged version and "EIPL" for the leveraged series.

UBS Investment Bank is the agent.

The $10 million in sales in both series came from seed capital.

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