InwardListedETNs

 

RMB and FNB have jointly launched an inward listed equity exchange traded note (ETN) programme. ETNs are debt instruments listed on the JSE that track the value of an underlying reference asset.

 

Each of the ETNs will track a single underlying share. As an example here, let’s use Apple shares.

There are two types of ETNs with different pay-off profiles:

1. Quanto: These ETNs track the price of an underlying share (such as Apple) without taking the USD/ZAR exchange rate fluctuations into account. The price of the ETN increases or decreases in line with only the percentage movement in the underlying share. So, if Apple shares go up 10% in US dollars, the ETN will go up 10% in rands.
2. Compo: These ETNs track the price of both an underlying share as well as the USD/ZAR exchange rate. So, if the Apple share goes up 10% in US dollars and the rand weakens by 10%, an investor will be on the receiving end of a 20% move. Likewise, if the Apple share goes up 10% in US dollars and the rand strengthens by 20%, the investor stands to lose 10%.

The quanto pay-off allows an investor to separate the effects of share price performance from rand performance. An investor can hold a view on an underlying share purely on the merits of that share, and gain USD/ZAR exposure separately in a manner that is appropriate for currency investing.

By contrast, the compo pay-off will also allow investors to combine the effects of a ZAR/USD view with a view on the underlying stock. The effect of this is that when the currency weakens simultaneously to the underlying share gaining, the return to the investor is amplified. However, if the currency strengthens while the underlying stock loses value, the negative effect is also amplified. There is also the possibility that a gain/loss in the underlying share could offset the gain/loss in the currency.

The ETNs have the following features:

1. Affordability – the ETNs have all initially listed at R10, giving investors very affordable exposure to foreign shares;
2. Exchange control – does not use individual or corporate allowance;
3. Choice of pay-offs between quanto and compo; and
4. Global icons – the ETNs provide investors with access to some of the world’s biggest and most well-known companies.

To view the listing documentation, click here.