Are You Ready For More E-TRACS?

If you haven’t heard of E-TRACS, you aren’t the only one.  This family of exchange-traded products has gone nowhere.  Every product they offer, except one, is on my Deathwatch list.  Their products have meager assets and almost no trading volume, but the sponsors keep on plugging along.  It’s impressive, in a way.

Now E-TRACS has launched yet another potentially doomed product: UBS E-TRACS DJ-UBS Commodity Index Total Return ETN (DJCI) began trading on October 29, 2009.  For all practical purposes, there is nothing to distinguish DJCI from several other ETFs and ETNs that track similar broad commodity indexes.  If ever there were a “Me Too” product, this is it.  The only possible reason I can see to create this fund is that regulators are trying to cap the size of commodity-based exchange-traded securities.  E-TRACS may think they will get some spillover buying from investors who are locked out of better-known funds.

This seems like a slim hope.  So slim, in fact, that I considered placing DJCI on immediate Deathwatch by declaring an exception to my normal six-month waiting period.  Think about it.  It already has three strikes against it:

Strike 1: It’s an ETN and contains ETN risk – namely it is an unsecured debt obligation of the issuer, UBS.  Granted, many commodity based exchange traded products are ETNs, but given the choice of an ETF or ETN, I will take the ETF until such time that ETN sponsors make these “secured” obligations.

Strike 2:  It’s subject to CFTC regulations, and the CFTC would probably prefer that this product did not exist.  One such product has already been shut down and others are essentially being forced to modify their indexes.  Many newer products, like those from CRB-Q, are bypassing the CFTC altogether.

Strike 3:  It’s from E-TRACS.  Be honest now.  How many of you are familiar with E-TRACS?  How many of you knew that UBS was the company behind E-TRACS before you started reading this article?  That’s what I thought.  This is their 11th exchange-traded product, yet most ETF investors have never heard of them.  As I mentioned earlier, nine of the existing ten are on Deathwatch.

In baseball, it’s “three strikes – you’re out”.  However, I’m going to play by my own rules and allow it my standard six-month grace period. 

Maybe UBS is trying to change their ways as this is the first time they identified themselves by placing their name prior to the E-TRACS brand as part of the product’s name.  The underlying index, which is the same index used by three other ETF/ETN products, is relatively diversified for a commodity index.  The target weights can be found on the summary page and fact sheet.  DJCI has a 0.50% expense ratio. 

Its primary competitor is the well-established iPath DJ-UBS Commodity Total Return ETN (DJP).  DJP currently has about $1.9 billion in assets with an average daily value traded in excess of $16 million per day.  However, its expense ratio is currently 0.75%, which may be DJCI’s only hope of survival.

Disclosure compliant with FTC 16 CFR Part 255 covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.