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The Market's Measure

Where’s the Gold-Hedged S&P 500?

The exchange-traded note flies, er, drifts under the radar.

Back in 2010, there was a fair amount of hoopla generated by the launch of the E-TRACS S&P 500 Gold Hedged Index ETN (NYSE Arca: SPHG), a first-of-its kind product designed to smooth out bumps in a then-nascent equity market recovery. By tying together two historically divergent assets—gold and stocks—note holders should have been able to simulate S&P 500 returns hedged against the fluctuations of the U.S. dollar versus gold. Why “should have”?

Well, that’s an interesting story. But let’s not get ahead of ourselves.

First, you need to know that SPHG notes are unsecured debt obligations of BBB-plus-rated UBS AG (Jersey). Um, that’s the Isle of Jersey, not the Garden State. You also should know that the SPHG offering was one of the Swiss bank’s most lightly subscribed ETN issues. In October, when a significant liquidity event occurred (more on that in a minute), more than 99 percent of SPHG notes issued remained in the hands of UBS Securities LLC, the bank’s selling agent.

One of the reasons for the light interest was the note’s call feature. Starting in 2011, UBS AG had the right to redeem the notes at market value whenever it pleased. Note buyers, in effect, were forced to give away a put option of indeterminate length with an unknown strike price. No wonder interest was sparse.

Then came that liquidity event. Last fall, UBS AG announced it was suspending issuance of new notes in a wide swath of its ETRACs ETNs, including SPHG. The notes continued to trade on the NYSE Arca mart and UBS Securities LLC could still sell from its inventory the 3.9 million notes it already held.

But no matter; the announcement had a chilling effect on already frozen sales. Then, the ETN dropped off the securities masters of retail brokerages and financial websites. Just try to pull up a quote for SPHG on, say, TD Ameritrade’s platform or on Yahoo! Finance nowadays. You get nuthin’. Zip. Nada. Bupkes.

And that’s too bad. The notes’ intrinsic value has shot up recently as the equity market faltered and gold finally found a bid. The index underlying the SPHG notes was up 12 percent in January versus a 4 percent gain in the S&P 500. And, in February, the correlation between gold and stocks grew even more negative (see the chart below).



Obviously, the value of these notes can’t be realized by new investors. Oh, sure, you can still find a two-way market posted on NYSE Arca, but you’d have a hard time getting a trade executed if your broker won’t recognize the security.

Still, there is hope for those who’d like a self-balancing stock-and-gold package. There’s a new gold-hedged S&P 500 product—this time a fund, not a note—awaiting launch. The REX Gold Hedged S&P 500 ETF (NYSE Arca: GHS) will track virtually the same index as SPHG while carrying lower annual expenses. And it won’t expose holders to the risk of dealing with a capricious debt-issuing bank.

Details can be found at


Brad Zigler is REP./WealthManagement’s Alternative Investments Editor. Previously, he was the head of marketing, research and education for the Pacific Exchange's (now NYSE Arca) option market and the iShares complex of exchange traded funds.

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