Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

New RBS ETN Alternates Between 3 Large Cap Weighting Schemes

On September 6, the Royal Bank of Scotland Group plc (NYSE:RBS) rolled out the RBS US Large Cap Alternator Exchange Traded Note (NYSEARCA:ALTL).  The underlying index uses a multi-period momentum strategy to provide exposure to either the S&P 500 Total Return Index, the S&P 500 Equal Weight Total Return Index, or the S&P 500 Low Volatility Total Return Index.

Royal Bank of Scotland Group plc (ADR) (NYSE:RBS)

A “Relative Strength Score” is assigned to each of the three large cap stock weighting methodologies on the last business day of each calendar month.  The calculation uses the simple average of the returns for the prior one-month, three-month, six-month, nine-month, and twelve-month periods.  The ETN’s index will track the return of the weighting scheme with the highest Relative Strength Score during the following month.  The monthly rebalancing takes place at the close of business on the first trading day of the month.

ALTL has an annual investor fee of 1.00%.  Additional product information is available in theoverview page, fact sheet (pdf), and prospectus (pdf).

Analysis/Opinion: RBS supplied hypothetical backtested results for the underlying index as part of the prospectus.  The performance graph (shown below) begins 1/2/1992.  Unfortunately, it uses an arithmetic scale instead of a log scale, which distorts the long-term performance characteristics, and it shows the results for the index instead of the ETN.  A table is also provided, but its data begins a year later (12/31/92) and also does not adjust for the 1.00% annual investor fee.

New RBS ETN Alternates Between 3 Large Cap Weighting Schemes

My calculations, based on the data in the prospectus, along with a 1% annual reduction of ALTL’s underlying index to account for the investor fee, produced the following results for the period 12/31/92 – 8/29/12:  The backtested ALTL ETN had an estimated +11.7% annual return with a 16.1% standard deviation.  The comparative returns (and standard deviation) of the other underlying indexes were +8.3% (19.1%) for S&P 500 Total Return, +10.1% (19.3%) for Equal Weighting, and +10.0% (14.2%) for Low Volatility.

It is possible to implement this strategy on a do-it-yourself basis using Vanguard Index Funds (NYSEARCA:VOO), PowerShares Exchange-Traded Fund Trust II (NYSEARCA:SPLV), and Rydex S&P Equal Weight (NYSEARCA:RSP).  However, investors need to weigh the monthly transaction costs, tax consequences, and underlying ETF expense ratios against the 1% annual fee and inherent credit risk of ETNs like ALTL.

This article was originally written by Ron Rowland, and posted on InvestWithAnEdge.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.