UBS launches Risk On, Risk Off ETNs (ONN, OFF) - Top 5 Best Performing ETFs

As the markets continue to experience wild swings over extremely short periods of time, many investors have looked to alternative products in order to help boost returns in these shaky environments. While leveraged and commodity ETFs have become extremely popular, funds tracking volatility indexes, such as VXX, have also gained a huge following. Yet, many investors are beginning to feel the often devastating impacts of contango in these products, pushing them to consider new ways to express their views on the global economic situation. For these investors, the recent launch of the Risk On (ONN) and Risk Off ETNs (OFF) from UBS could be welcomed news.

The two products seek to allow investors to either implement a ‘risk on’ or ‘risk off’ strategy via a single exchange-traded product, something that may be cheered by a variety of investors and traders. This could include those seeking to hedge their portfolios as well as those looking to just make a short-term play on the overall health of the markets. “Correlation between asset classes and across geographic regions has risen dramatically over the past two decades as investors move in concert in reaction to changes in the global economic outlook,” said Christopher Yeagley, Managing Director and US Head of Equity Structured Products. “These two ETNs are designed to give investors the ability to take advantage of this in a straightforward manner: if they expect economic growth, they can purchase ONN to express a “risk on” view, and if they don’t expect growth, they can purchase OFF to express a “risk off” view.” (see Commodity Currency ETFs Surge On Global Liquidity Push)

In terms of holdings, the risk on product seeks to go long in assets that tend to outperform when global markets are surging, leaving the basket long in products such as commodities, currencies such as the euro, and broad stock markets. Meanwhile, the fund will also pair this with a short position in a variety of lower risk currencies as well as shorting a few bond futures. Meanwhile, the risk off product—unsurprisingly—seeks to do the exact opposite, going short in commodities while going long in low risk currencies such as the franc and the yen while also going long in bonds such as 10 Year Treasury bond futures, 30 year German Bund Futures, and 10 Year Gilt Futures.  In summary, the top five long and short holdings of each ETN are listed below:

Top Five Long & Short Holdings of ONN:

 

Long Holding	Weighting	Short Holding	Weighting
Crude Oil	20%	10 Year US Notes Futures	-16%
Brent Oil	14%	Japanese Yen Futures	-12%
Euro Futures	14%	30 Year German Bund Futures	-12%
Corn Futures	10%	10 year Gilt Futures	-6%
S&P 500 ETF Trust (SPY)	9.2%	Swiss Franc Futures	-4%

Top Five Long & Short Holdings in OFF:

 

Long Holding	Weighting	Short Holding	Weighting
10 Year US Notes Futures	16%	Crude Oil	-20%
Japanese Yen Futures	12%	Brent Oil	-14%
30 Year German Bund Futures	12%	Euro Futures	-14%
10 year Gilt Futures	6%	Corn Futures	-10%
Swiss Franc Futures	4%	S&P 500 ETF Trust (SPY)	-9.2%

Overall, the products seem to be mirror images of each other, perfectly matching their counterpart in terms of holding percentages. However, there is one key difference that investors need to be aware of between the two; expenses. The risk off ETN charges investors 1.15% a year as a tracking fee while ONN charges investors 0.85% for its services. Yet, while ONN does charge less for its services on the tracking fee front, the product does have an ‘annual distribution amount’ that will be equal to 1% per year that investors also need to consider if they purchase this product (OFF doesn’t have a similar stipulation).

Fisher-Gartman Risk Index

Both funds are based on the Fisher-Gartman Risk Index which is a benchmark created by Mark Fisher and Dennis Gartman. The two individuals sought to develop a formula that defines the concepts—in asset terms—of the standard phrases ‘risk on day’ and ‘risk off day’ seeking to rise when the economic outlook is positive and slump when the forecast turns negative. The value-based target weightings for the long and short positions are 150% and 50%, respectively, and the Index is rebalanced quarterly to return the weightings to these target levels (also see Top Three Precious Metal Mining ETFs).

The two funds could be popular with traders looking to make plays on the broad market but are weary of investing in leveraged products or funds such as VXX which can experience significant contango problems over long holding periods. Nevertheless, the credit risk of the underlying issuer of the ETN, compounded with the relatively high cost of these products, could result in a severe fight for assets by these upstart exchange-traded products. So while the Fisher-Garman Risk Index may be appealing to some investors, the fund looks to have a real fight on its hands in its attempt to get assets and trading volumes higher in the near term (read Avoid Turmoil With The Community Bank ETF).

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