ELEMENTS Platform Launches Dow "Dogs" ETN
November 09, 2007
The exchange-traded notes market is finally starting to heat up a bit. The ELEMENTS ETN platform added another ETN to its lineup with the launch of the ELEMENTS Dow Jones High Yield Select 10 Total Return Index ETN (NYSE Arca: DOD), bringing its total to seven products. Like all of the other ETNs on the ELEMENTS platform, it carries an expense ratio of 0.75%.
The methodology of the index underlying the ETN, the DJ High Yield Select 10 Total Return Index, is based on a strategy very similar to the "Dogs of the Dow," which was developed under the premise that a high dividend yield indicates a depressed stock price. Every December, the index is rebalanced to include the 10 stocks with the highest annual dividend yields in the Dow Jones Industrial Average. Although the DJIA is a price-weighted index, the components of the DJ High Yield Select 10 Index are equal-weighted.
The current components of the index include Verizon, JPMorgan Chase, DuPont, General Electric, General Motors, Altria, Merck, Pfizer, AT&T and Citigroup. With just 10 stocks, the index is a bit narrow for an exchange-traded fund or regular mutual fund, but a note, which does not actually hold the underlying stocks, might be the perfect vehicle for it.
Deutsche Bank is the issuer of DOD. It is also the issuer of the ETN linked to the Morningstar Wide Moat Focus Total Return Index (NYSE Arca: WMW).
Like Barclays Bank's iPath ETN family, the ELEMENTS platform features products that offer exposure to unique slices of the market. Although the iPaths have a few billion dollars in accumulated assets and the ELEMENTS ETNs have yet to break $50 million, the ELEMENTS platform could develop into a formidable competitor. Because ETNs are debt instruments, much of their value stems from the creditworthiness of their issuers. The ELEMENTS platform currently has two issuers, with the potential to add more, meaning the credit risk associated with the brand will be more diversified than with the iPaths. And as a platform with multiple issuers and distributors involved, it also offers more opportunity for cross-marketing synergies, something that could be very important in taking on the iPaths, which can piggyback off of Barclays Global Investors' well-known iShares family of exchange-traded funds.
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