UBS ETNs Join Dot-Com Frenzy

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Since I wrote that blog, two more dot-coms have had wildly successful IPOs. Online vacation rental site HomeAway closed almost 50 percent above its IPO price on its first day of trading on June 29. Three weeks later, online real estate site Zillow surged 200 percent on its first day of trading, before closing the day up roughly 78 percent.

As expected, social network game developer Zynga filed for an IPO, and investors also learned that Groupon’s main competitor in the online deal-of-the-day space, LivingSocial, is talking to banks about a potential IPO filing.

I previously mentioned two existing Internet ETFs, the First Trust Dow Jones Internet Fund (NYSEArca:FDN) and the PowerShares Nasdaq Internet Portfolio (NasdaqGM:PNQI), that provide exposure to the entire Internet sector.

But now, those looking to dive specifically into the volatile world of Internet IPOs can do so through a couple of new ETNs. On July 21, UBS launched two exchange-traded notes, the ETRACS Internet IPO ETN (NYSEArca:EIPO) and the Monthly 2X Leveraged ETRACS Internet IPO ETN (NYSEArca:EIPL).

The two notes are based on the market-cap-weighted UBS Internet IPO Index, which includes online social networking and Internet software and services companies that have been listed on NYSE or Nasdaq for less than three years.

EIPO will track the index, while EIPL is designed to act like EIPO on steroids by giving investors a leveraged double exposure to the index with rebalancing taking place monthly.

But most importantly, the UBS Internet IPO Index allows for new Internet IPOs to be included in the benchmark within weeks of their IPO by reviewing its index components on the first Tuesday of each month. For example, LinkedIn, Pandora and HomeAway are already among the index’s top five holdings.

The index includes depositary receipts of foreign companies traded in the U.S. as well, and caps the weighting of any single constituent at 10 percent. Also, as I said, companies have a three-year shelf life in the index, meaning that if it’s been public for three or more years, it gets kicked out.

Investors should also remember that EIPO and EIPL are structured as ETNs, which are unsubordinated, unsecured debt notes issued by banks that track a specific index. This means they carry credit risk, so if the bank issuing the note goes bankrupt or defaults—UBS in this case—the investors can lose their entire investment, since ETNs don’t hold any physical assets.

While the two ETNs provide an exciting way for investors to gain quick exposure to these new Internet “hotties,” they’re probably not for the faint of heart. The astronomical valuations of some of these recent dot-com IPOs are already making investors question whether this is turning into a bubble.

Moreover, the quick turnaround on the part of issuers rushing new products to market can’t be ignored either. For example, the UBS Internet IPO Index was only created on July 7, and the ETNs are already trading. Also, Global X Funds just put a social media ETF into registration with the Securities and Exchange Commission.

While both EIPO and EIPL should be shortable, I’m actually surprised UBS also didn’t launch an inverse version of these ETNs for those convinced there’s a bubble brewing and want to bet against this current Internet IPO craze.

But one way or another, if you’re looking to play this frenzy through EIPO and especially EIPL, buckle up and hold on to your pants, because you might be in for a wild ride.

Ticker

EIPO

EIPL

Fund Name

ETRACS UBS Internet IPO ETN

Monthly 2X Leveraged ETRACS Internet IPO ETN

Underlying Index

UBS Internet IPO Index

UBS Internet IPO Index

Note Issuer

UBS

UBS

Inception

7/20/2011

7/20/2011

Expense Ratio

0.65%

0.65%

Index Constituents*

20

20

Top 5 Index Constituents and Weightings (%)

LinkedIn (10), HomeAway (10), Yandex (10), Rackspace Hosting (10), Pandora (9.57)

LinkedIn (10), HomeAway (10), Yandex (10), Rackspace Hosting (10), Pandora (9.57)

Index Component Review*

Monthly

Monthly

Weighting Scheme

Market Cap (constituents capped at 10%)

Market Cap (constituents capped at 10%)

Leverage

Non-leveraged

Leveraged 2X, Monthly

*As of index creation on July 7, 2011

 

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Copyright ® 2011 IndexUniverse LLC . All Rights Reserved.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: FDN , PNQI

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