Barclays Capital yesterday announced the listing of its iPath Dow Jones-UBS commodity index total return exchange-traded note (ETN) on the Singapore Exchange, the first ETN in Asia (including Japan).
The UK bank has offered iPath ETNs -- senior, unsecured, unsubordinated debt securities linked to the performance of an index -- in the US since 2006, where they have reached $5 billion in market capitalisation.
They are designed as simple, transparent, cost-efficient instruments that combine access to difficult-to-reach markets with the ease of being exchange-traded.
Peter Hu, Asia head of investor solutions at Barclays Capital in Singapore, says it wasn't appropriate to list ETNs outside the Americas in 2006, but the bank has been working over the past 18 months to be able to deliver the products in Asia. It has also since launched these products in Europe.
The exchange-traded medium is an important one, he adds, as it provides transparency and liquidity. Moreover, the simple, non-structured format of ETNs may help mitigate some of the loss of investor confidence that resulted from the issuance of retail notes such as minibonds in Hong Kong and Singapore, says Hu.
Two core differences between iPath ETNs and iPath exchange-traded funds (ETFs) are that ETNs still carry counterparty risk of the issuer (unlike iPath ETFs), but do not (like ETFs) carry any risk of tracking error. That's because of the iPath ETN total-return swap structure; Hu notes that ETFs could also use such a structure to prevent potential tracking error.
Meanwhile, ETFs have recently been highlighted as over-expensive by some, although whether that will be the case for ETNs in Asia has yet to be seen.
As for the most likely clients of ETNs, there is probably greater interest from institutions in the US, says Hu, but he adds that he would rather avoid comparing what may happen in Asia with the experience in the US. The bank's aim is to target both institutions and retail investors, he says, and demand patterns will be a lot clearer 12-24 months down the line.
"We launched [a commodity-based ETN in Asia] on the basis that there's a gap in the market," says Hu, "and subject to regulatory approvals, we will launch equity- and currency-based and other types of ETNs", as Barclays has done elsewhere.
Meanwhile, the fact that ETNs are not principal-protected will also affect the investors they are likely to attract, as of course will the historical returns.
Returns of the Dow Jones-UBS commodity index have not been ideal in recent years. One-, three- and five-year annualised returns to September 30 were -23.71%, -4.91% and -0.70%, compared to
-6.91%, -5.43% and +1.02% for the S&P 500. Admittedly, though, the Dow Jones-UBS commodity return index did outperform the S&P GSCI total return index over the same timeframes (-44.52%,
-10.80% and -6.71%).
"Performance going forward is not something we are forecasting," says Hu, "nor are we looking at historical performance to sell the products. The aim is to provide access to multiple, difficult-to-access underlyings on a transparent basis."
As of September 30, the weightings of the Dow Jones-UBS commodity index total return ETN were 33.14% energy, 25.33% industrial metals, 25.18% agriculture, 11.29% precious metals and 5.07% livestock.