Wednesday, December 16

Exchange traded note launched in Singapore

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Exchange traded note launched in Singapore
(Taken from the Straits Times on the 16th December 2009)

A new product class similar to exchange traded funds (ETFs) has been launched in Singapore — the first of its kind in Asia outside Japan.

Called exchange traded notes (ETNs), the first of this new breed of product was listed by Barclays Capital on the Singapore Exchange (SGX) last Friday, with more expected in the coming years.

Denominated in US dollars, the first ETN trades in units of 100 and has a yearly fee of 0.75 per cent.

So far, there has been muted response. No trades were done yesterday. Its quoted selling price on the SGX was US$40.86.

Referring to the ETNs, Philippe El-Asmar, Barclays Capital's head of investor solutions, said: “They provide investors with simple, transparent, cost-efficient instruments that provide access to difficult-to-reach markets with the ease of trading through an exchange.”

ETNs are senior, unsecured debt securities linked to the total return of a market index. They were first offered in the United States in 2006 by Barclays Capital under its iPath ETN platform.

According to El-Asmar, iPath ETNs in the US have attracted more than US$5 billion (RM17 billion) in market capitalisation with over US$80 billion in volume traded since their inception.

The first ETN offered in Singapore is an iPath Dow Jones-UBS Commodity Index Total Return ETN, which gives retail and institutional investors a chance to gain exposure to a broad range of commodities during Asian trading hours.

Janice Kan, SGX's senior vice-president and head of product development, said: “The launch of this new product class broadens our suite of investment offerings, and will provide investors with cost-efficient access to the commodities asset class, and eventually a range of other asset classes.”

Perhaps the closest relations of ETNs are ETFs, which are baskets of stocks that typically track the performance of a stock market index. ETFs can also be theme-driven, focusing on certain asset classes or commodities such as gold or agriculture.

ETFs generally carry lower costs — zero sales charges and lower management fees — than unit trusts because they are passively managed.

They trade like stocks on the bourse, so one can buy and sell them at market prices during the trading day. They provide exposure to a variety of markets and offer greater diversification than shares.

ETFs have been growing in popularity in Singapore, with a total of 43 listed and a daily traded volume of S$18 million (RM43 million).

However, ETNs differ from ETFs in several ways. ETNs generally lapse after 30 years and do not yield dividends, whereas ETFs have no expiry date and some offer dividends.

ETNs carry no counterparty risk, unlike certain ETFs, which use derivatives. But ETNs carry an issuer credit risk, as they are debt obligations owed by the issuer to investors.

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