RBS Introduces Mid Cap Trendpilot ETN

January 28, 2011 by  
Filed under Commentary, ETF IPOs (New ETFs), ETNs

The Royal Bank of Scotland, more commonly known as RBS, added a second product to its US lineup with the introduction of RBS US Mid Cap Trendpilot ETN (TRNM) on Thursday (1/27/11).  RBS first entered the US ETN arena with a “timed” S&P 500 product back on December 8, 2010.

The new RBS US Mid Cap Trendpilot ETN (TRNM) follows the same basic strategy as its large cap brother, RBS US Large Cap Trendpilot ETN (TRND), except the strategy is applied to the S&P MidCap 400 Index.

The timing methodology employed by TRNM is to track the S&P MidCap 400 Total Return Index when it has been above its 200-day moving average for five consecutive days and to track the return of 3-month Treasury Bills when the S&P MidCap 400 has been below its 200-day moving average for five consecutive days.  A more complete description of the methodology is located in the TRNM fact Sheet (pdf).

TRNM, like TRND, has a unique variable investor fee (expense ratio) of 1.00% while it is tracking the S&P MidCap 400 and 0.50% while it is tracking T-Bills.

The original TRND has received criticism for both its perceived high expense fees and the 5-day lag in implementing switches.  I anticipated the fee objections in my original review of TRND, at which time I noted that critics would likely fail to recognize the cost benefits of tax-deferment this approach provides when owned in a taxable account.

I have not performed a detailed analysis, but I wouldn’t be surprised to learn that a 5-day lag reduces whipsaws and improves performance over a straight 200-day moving average approach.

If you like the idea of mitigating risk with a long-term moving average, then using TRNM to implement the strategy on mid cap stocks should provide extremely tax-efficient returns.  It pays no dividends, and you incur a tax liability only when you ultimately sell.  The downside is that since TRNM is an exchange-traded note (ETN) it is an unsecured debt obligation of RBS.

Additional information is located in the press release (pdf), summary page, and the prospectus (pdf).

Disclosure covering writer, editor, and publisher:  No positions in any of the securities mentioned.  No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

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