ETF research shows that while exchange traded funds continue to get most of the headlines, the roster of exchange traded notes is quietly growing. ETN funds differ from ETFs in the fact that they have no underlying assets – they are simply debt instruments that promise to track an index.
A new option emerged last week in the ETN space. Credit Suisse (NYSE: CS) unveiled the 2x Monthly Leveraged Credit Suisse Merger Arbitrage Liquid Index ETN (NYSE: CSMB), which aims to capture any spread between the price at which a stock targeted for a buyout trades after a proposed acquisition and the price the purchasing company has agreed to pay for the targeted company. Merger arbitrage funds are not uncommon, and as InvestorPlace contributor Tom Taulli noted in February there is a chance for increased activity for these investments in 2011.
In an ETN there are no constituent companies to break down, as with exchange traded funds. This makes them a little more slippery, but allow fund investors access to some interesting options. Tracking the merger arbitrage index as with the CSMB fund is a good example.
Merger arbitrage funds see potential gains realized when deals are completed whereas potential losses occur when deals fall through. CSMB is benchmarked to the Credit Suisse Merger Arbitrage Liquid Index with double monthly leverage. The index attempts to employ a merger arbitrage strategy by using a quantitative methodology to track a dynamic basket of securities held as long or short positions and cash weighted in accordance with the index rules to reflect publicly announced merger transactions that meet certain qualifying conditions.
Credit Suisse, like Barclays (NYSE: BCS), JP Morgan Chase (NYSE: JPM) and other banks, has joined the ETN race by launching products linked to proprietary products.
At the end of February, there were 135 U.S. listed ETNs with $15.99 billion in assets. Unlike ETFs they carry credit risk of the issuing bank or financial institution.
The CSMB exchange traded note has an annual fees of 0.55% plus an additional cost of 0.95% for leverage of this ETN.
Credit Suisse also offers an unleveraged version of its merger strategy in the Credit Suisse Merger Arbitrage Liquid ETN (NYSE: CSMA).
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