Exchange-Traded Note Assets Surge on Dividends, Higher Liquidity

Holdings of U.S. exchange-traded notes have climbed by about a third this year while sales of unlisted structured securities stagnate, as investors prefer their greater liquidity and access to dividends.

Issuance of structured notes, which are bonds packaged with derivatives that offer customized bets on markets, fell to $28.5 billion this year through Sept. 20, down less than 1 percent from the same period of 2012, according to data compiled by Bloomberg. The market capitalization of ETNS, which are similar though easier to trade, rose by 34 percent since Dec. 31 to $21.5 billion.

ETNs are becoming more popular because many pay coupons based on company dividends, said William Braman, chief investment officer at Ballentine Partners LLC. A bigger secondary market also exists because of the exchange listings and more transparent prices, he said.

“With ETNs, you get the full underlying value of the index,” he said in a telephone interview from his office in Waltham, Massachusetts. For most structured notes, “the dividend goes into the counterparty’s pocket, along with the fees.”

Ballentine, which has more than $4 billion in assets under management, invests almost $15 million in ETNs that track master limited partnership companies, he said.

UBS AG (UBSN)’s U.S. ETN assets have grown the fastest of any bank this year, more than doubling to $3.29 billion from $1.42 billion. The bank offers 30 ETNs that track the prices of assets from silver to stocks to mortgage real estate investment trusts.

Note Sales

Meanwhile, its U.S. structured note sales fell 43 percent this year to $1.48 billion, Bloomberg data show. While UBS issued about 1,500 securities that mature in three months to 10 years, the Swiss bank didn’t have a single offering larger than $35 million, compared with a $946.2 million deal bought by Fisher Asset Management LLC in May 2012.

That security was tied to the Russell 1000 Growth Index, and the week before it matured in May, shares outstanding of the FI Enhanced Big Cap Growth ETN, linked to the same benchmark, increased 3.5 times, Bloomberg data show. Fisher Asset holds 22 million shares, or 94.8 percent of the ETN’s total, according to documents filed with the U.S. Securities and Exchange Commission.

David Eckerly, a spokesman for Fisher Asset, which is owned by billionaire investment adviser Ken Fisher, declined to comment on the exchange-traded securities. He said previously that another ETN that the firm helped structure “efficiently accommodates inflows and outflows.”

UBS considers structured notes and ETNs to be part of the same business, Megan Stinson, a spokeswoman for the bank, said in an e-mail. “Our structured products platform offers both structured notes and ETNs to best suit our clients’ needs.”

Secondary Markets

ETNs, which like structured notes are debt obligations of the seller, can be more advantageous for investors because prices can be obtained from multiple sources, Braman said. The secondary market for unlisted structured notes is limited, and banks that issue the securities may use their own models rather than market values for determining prices.

“There is no liquidity in a structured note,” Braman said.

Derivatives are contracts whose value is derived from stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.

To contact the reporter on this story: Kevin Dugan in New York at kdugan4@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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