The Royal Bank of Scotland (RBS), named Structured Funds House of the Year in the Structured Products Europe Awards 2011, recently launched the world’s first exchange-traded fund (ETF) that tracks the performance of an underlying index comprised exclusively of commodity trading adviser (CTA) managers.
The RBS Market Access CTA Index ETF – a Ucits-compliant ETF – has been trading on the Deutsche Börse in Frankfurt since September 15, 2011 and provides exposure to a diversified pool of CTA managers, which combines several well-known managers with market specialists and smaller managers.
This new ETF tracks, through a swap, the performance of the RBS CTA Index, which allocates an equal weighting to the RBS Discretionary CTA Index and the RBS Systematic CTA Index. Within these constituent indexes, the allocation to each manager depends on their performance, correlation to each other and volatility. The managers achieving the best score against these criteria are allocated the highest weighting. The index allocation methodology is fully rules-based and transparent, and it ensures that investors reward the better managers with higher risk-adjusted allocations.
The benefits of this new CTA-linked ETF may be significant. Since 2001, the one-year rolling correlation of CTAs to global equities (MSCI World Index) rose in rising equity markets and quickly dropped in falling markets. Between June and December 2008, for example – the period during which global equities lost 44.7% of their value – the one-year rolling correlation between CTAs and global equities dropped by 71.4%, thereby demonstrating the strength of CTAs as a diversifying investment. Combining assets in an investment portfolio in which returns show low or negative correlation to each other is a way of reducing investment risk. These attractive correlation characteristics, combined with strong historical returns, have helped contribute to substantial capital inflows into CTAs in recent years.
The RBS CTA Index has several distinct advantages over traditional funds of hedge funds. It allocates only to managed accounts, where funds of hedge funds typically allocate to (offshore) funds. Moreover, the managed accounts underlying the RBS CTA Index are continuously monitored by administrators independent of the CTA managers and RBS. These features provide excellent transparency and liquidity. Funds of hedge funds may, by contrast, offer lesser liquidity – typically, only monthly or quarterly redemptions are possible.
Pieter Dalderop, head of fund derivatives structuring at RBS, said: “The RBS Market Access CTA Index ETF offers exposure to managers that may not be available through single-manager Ucits funds in a cost-efficient, Ucits-compliant and exchange-traded format.”
The indexes and ETF described in this article are intended for institutional investors only and are not suitable for retail investors. The value of investments can go up as well as down. This article has been prepared for information purposes only. It shall not be construed as, and does not form part of, an offer/invitation to offer/solicitation to enter into any transaction or an offer/solicitation to buy or sell any security or financial instrument. Views expressed herein are not intended to be and should not be viewed as advice or recommendation. In order to replicate the RBS CTA Index, the ETF enters into a swap agreement. Investors are therefore exposed to the risk that the swap counterparty, RBS plc, defaults. If that occurs, they could suffer a loss of their investment. Additional risk factors can be found in the prospectus of RBS Market Access. Investors should read such prospectus and the simplified prospectus of the ETF carefully before investing, and inform themselves about the features of the indexes and ETF, the risks involved, potential legal and tax consequences, and offering restrictions or exchange control requirements that may be encountered under their local country’s laws and regulations. Such indexes and ETF are in no way sponsored, endorsed, sold or promoted by any of the CTA managers or any third parties referenced herein. The ETF is not and will not be offered or sold in the United States to or for the account of US persons as defined by US securities laws. This document is not for distribution in the US or to US persons. RBS Market Access is regulated by the Commission de Surveillance du Secteur Financier in Luxembourg. The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. The Royal Bank of Scotland plc, authorised and regulated by the Financial Services Authority.