Lyxor, the fund management subsidiary of Société Générale, and Europe's second-largest manager of exchange-traded funds, is to launch its first exchange-traded note ("ETN") on the London Stock Exchange. The ETN, tracking the gold price, is expected to be the first in a series of commodity-linked securities.

The ETN launch and the intention to launch a broader commodity note range will be seen as a direct challenge to ETF Securities, whose exchange-traded commodities ("ETCs") have up to now had a monopoly position in single commodity trackers in Europe. ETF Securities now has over US$ 10 billion under management, the vast majority in ETCs.

Dan Draper, Global Head of Lyxor ETFs, explained that the launch of a range of ETNs came in response to client demand. Lyxor, he said, already has two diversified commodity ETFs, based on the Reuters/Jefferies CRB indices, but investor interest in single commodity products continues to increase.

The ETN structure is required, added Draper, since European regulations do not permit investment in fewer than five underlying constituents or securities in a UCITS-compliant exchange-traded fund.

The Lyxor ETN will be collateralised with European government bonds, or by securities rated AAA by Standard and Poor's. The ETN issuer will be a Luxembourg-domiciled special purpose vehicle ("SPV"), to which Societe Generale will offer a guarantee, in addition to the collateral held.

By contrast, ETF Securities' physical gold ETCs - Gold Bullion Securities (GBS.L) and ETFS Physical Gold (PHAU.L) - are collateralised by allocated gold bullion. Most of ETF Securities' other ETCs are collateralised by fixed income securities, with a minimum rating of Aa3 (Moody's) or AA- (Standard and Poor's).

Lyxor believes, said Draper, that his company's ETN range will be of interest to clients who wish to diversify their issuer risk. He added that investors should be attracted by the fact that the collateralised note structure will be the same across the whole single commodity range. Lyxor has also obtained an opinion that their ETNs will be eligible for capital gains tax relief in the UK.

The Lyxor gold ETN will carry a fixed management charge of 0.30% per annum, plus a variable charge to cover the cost of collateral, currently running at around 0.90% per annum. Details of the variable charge will be available on the company's website, and updated daily.  ETF Securities' Gold Bullion Securities carries a management fee of 0.40% a year, and ETFS Physical Gold a fee of 0.39% a year.

No further details are yet available on the launch of subsequent Lyxor Commodity ETNs.