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Swedish Export Registers $1 Billion In New Exchange-Traded Notes

Swedish Export Credit Corp., a Stockholm, Sweden-based state-owned firm, is gearing up to participate in an offering of as much as $1 billion in four new exchange-traded notes (ETNs) that will track to four lesser-known commodity indexes.

The ETNs are expected to begin trading on a stock exchange sometime later this year, and mark only the fourth participant in the fledgling ETN marketplace, which up until recently was the sole territory of Barclays Capital, Goldman Sachs and Bear Stearns. Barclays launched its first iPath ETNs in June 2006, Goldman and Bear, this past July.

On Oct. 4 Swedish Export Credit registered with the Securities and Exchange Commission to offer up to $250,000 each in four separate ETNs branded under the Elements name. Both Nuveen Investments of Chicago and Merrill Lynch of New York will distribute the new ETNs.

Each of the soon-to-debut ETNs will tie its performance to a different index of Rogers International, including the broad-based total return commodities index created in July 1998, and three sub-indexes that track from six to 20 commodities futures contracts in the agriculture, metals and energy sectors.

An annual investor fee of 75 basis points will be charged. Redemptions will initially be on a weekly basis, but investors will not be allowed to redeem any portion of their investment within the first 90 days.

ETNs vs. ETFs

ETNs trade on a stock exchange similar to the way exchange-traded funds (ETFs) trade. Additionally, like ETFs, ETNs can be sold short. But unlike ETFs, which hold baskets of equities, fixed-income securities or even hard currencies, ETNs are direct senior, unsecured debt obligations, or bonds, issued by the particular firm acting as sponsor. That means they are beholden to the issuer's ability to repay principal and any earnings in the future. If the issuer should go bankrupt, although unlikely, the investor would have to get on line with all other creditors of the firm.

An investor can hold the ETN until maturity or trade the ETN in the secondary exchange-traded market.

Like index mutual funds, ETNs track to the return of a particular underlying index, but they act like a stock in that they have no daily net asset value, as funds must. An ETN does, however, have a daily closing price just like a stock. Moreover, they are designed to give investors access to markets or sectors that other financial products do not ordinarily track.

Unlike a mutual fund, which can pay out dividends and/or capital gains, or passes through interest payments to investors in the case of fixed-income funds, ETNs do not pay any income. Rather, they simply return an investor's principal, plus earnings if the underlying index appreciates over time, minus any applicable fees. Of course, if the underlying index does not appreciate, that principal investment will be reduced.

ETNs, as well as ETFs, are more tax-efficient than mutual funds because investors realize direct gains or losses resulting from their own trades. In a mutual fund, when a fund manager sells securities, either to realize other investors' redemptions or to redeploy assets, all investors bear the fund's gain or loss.

ETNs are taxed, not as bonds, but as prepaid contracts, like swaps contracts. However, Internal Revenue Service rules could change that taxation in the future.

Expanding Elements

The first in the Elements series debuted this past August, when Swedish Export, Nuveen and Merrill announced the formation of the Elements series of ETNs.

The premier Elements ETN was designed to track the Spectrum Large Cap U.S. Sector Momentum Index, a proprietary index that was created by BNP Paribas of New York. The BNP Paribas index was created from the 10 sectors of the S&P 500 Total Return Index but utilizes a momentum investing strategy that includes daily sector reweightings. Each sector's relative weighting is adjusted with sectors outperforming the whole index being increased and underperforming sectors decreased.

"ETNs are designed to track various market indices across asset classes and provide access to both core and tactical strategies. They can be used by both retail and institutional investors," according to a statement from Nuveen.

ETNs burst onto the scene when Barclays Capital debuted its first two iPath ETNs 16 months ago. Unlike Swedish Export's 15-year Elements ETNs, Barclays' ETNs are issued with 30-year maturities.

The flagship iPath ETNs included one linked to the Dow Jones-AIG Commodity Index Total Return, and a second to the S&P GSCI Total Return Index, a global, broad commodities index. Since then, Barclays subsequently added six more ETNs, three linked to non-U.S. currencies, one linked to Indian equities, a crude oil ETN linked iPath and one linked to the CBOE S&P Buy Write Index's strategy.

Seeking Broad Appeal

Barclays' iPath ETNs hit the jackpot, amassing $3 billion in assets through last month. "iPath ETNs are bought by registered investment advisers and financial planners who receive fees for managing assets, not a commission to sell a product," said Philippe El-Asmar, managing director and head of investor solutions for the Americas at Barclays Capital.

But by its own website description, Barclays is hoping to also appeal to mutual fund managers, hedge fund managers and insurance companies as well as retail investors.

"Anytime a new product or index is introduced to the marketplace, it takes time for the investment community to understand and react to it. If a product or idea is successful, then it will gain market acceptance, and competitors will quickly follow suit," said Richard Ciuba, senior director of sales for the Americas at Dow Jones Indexes in New York. "I think we will see more investment banks and product issuers emerge as the ETN market continues to develop over the next few years," he added, noting that Dow Jones has received queries about licensing indexes for ETNs.

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