FBG Gets A Head-Scratching Creation

Every once in a while, assets in a particular security jump in a single-day creation and it makes you wonder, How or why did that happen?

Such was the case Tuesday with the UBS AG FI Enhanced Big Cap Growth ETN (FBG), an exchange-traded note that serves up twice the returns of the Russell 1000 Growth Index Total Return. It pulled in $621 million , lifting its assets 3 ½ times to $862 million in what appears to have been one huge trade.

Folks at UBS didn’t want to talk about the creation when we asked, but they didn’t deny that it actually happened. So it’s pretty much fair to say that it did happen.

Therefore, it’s also fair to ask why any investor would want to own FBG when you consider how expensive it is.

FBG costs 1.20 percent a year, or almost a third more than the 0.91 percent annual expense ratio on the ProShares Ultra S'P500 ETF (SSO), a somewhat similar security that offers up double exposure to U.S. large-caps, but in an ETF and rebalanced daily instead of monthly.

It comes down to the nature of ETNs, which do share with ETFs the hugely important creation-redemption mechanism that keeps their market prices converging with their net asset values as a matter of course.

The similarities pretty much end there.

The problem is that with a few notable exceptions, ETNs are usually highly boutiquey securities with off-the-beaten-track strategies that aren’t likely to attract a huge following.

Instead, ETNs often cater to the desires of a particular client, much like the “structured securities” that have been popular niche products for big Wall Street firms in recent years.

It’s not clear if clients approach the investment banks or if it’s the other way around.

But, except for hugely popular ETNs—such as the $1.43 billion iPath S'P 500 VIX Short-Term Futures ETN (VXX), which a fair number of investors use as portfolio insurance against volatility—it’s clear that most ETNs are simply the result of some discussion that’s confined to the inner bowels of large financial firms such as UBS.

So it goes that FBG’s huge $621 million creation may well remain a mystery in perpetuity.

But this much is no mystery:During the holder’s first two days of ownership when the markets fell amid concerns about flagging growth, FBG fell by almost 7 percent, with the extra loss a function of the double exposure.

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