ETNs: A New Path to Access Model Portfolios

Model portfolios are increasingly central to the strategies of wealth managers, enabling tailored investment solutions aligned with specific risk profiles. Traditionally delivered through UMAs, ETFs, mutual funds, and UCITS, there’s growing interest in secured Exchange-Traded Notes (secured ETNs) as an additional, strategic distribution channel, particularly beneficial for international and offshore investors.

Defining Model Portfolios

Model portfolios represent curated collections of investments built to meet defined objectives or specific risk tolerances. Typically managed by financial institutions, these portfolios offer consistency, scalability, and efficiency, enabling advisors to service diverse client bases effectively.

The significant growth of model portfolios underscores their attractiveness, with assets managed through these vehicles surging into trillions globally, highlighting their centrality in modern wealth management.

Introducing Secured ETNs

Secured ETNs are debt securities issued by financial institutions, uniquely collateralized or secured by underlying assets or cash holdings. Unlike traditional ETNs, which are unsecured and rely solely on issuer creditworthiness, secured ETNs mitigate credit risk through collateralization. Each secured ETN possesses a unique International Securities Identification Number (ISIN), enhancing transparency and traceability in global markets.

These secured ETNs directly track predefined model portfolios, structured precisely according to specified risk profiles. Thus, investors gain exact exposure aligned with their risk tolerance or investment objectives.

Strategic Benefits of Secured ETNs for Model Portfolio Distribution

1. Global Accessibility and Simplified Custody

Secured ETNs significantly streamline access for international and offshore investors. They can be readily listed on international platforms such as Euroclear, allowing global custody and settlement. Simultaneously, they support local custody solutions—for instance, Caja de Valores in Argentina—enabling broader investor engagement and flexibility.

2. Lower Investment Thresholds

Secured ETNs typically offer significantly lower investment minimums compared to traditional vehicles. This broader accessibility enables affluent and mass-affluent investors to incorporate professionally managed model portfolios into their investment strategies easily.

3. Cost Efficiency and Customization

Secured ETNs are designed with cost efficiency in mind, offering competitive structuring costs. Wealth management platforms can then add their own margins, facilitating economically viable and flexible distribution.

Additionally, secured ETNs can be structured as fully customized or co-branded offerings, aligning precisely with partners’ strategic objectives or market niches.

A Notable Example: LYNK Markets and BlackRock

As a practical illustration of this emerging trend, fintech provider LYNK Markets has issued secured ETNs that track BlackRock’s globally diversified model portfolios. This strategic collaboration demonstrates how secured ETNs enhance accessibility and simplify investment processes, enabling financial advisors to efficiently manage client portfolios through innovative fintech solutions.

Significantly, this flexible ETN distribution channel also benefits not only asset managers but also banks and other market participants involved in designing and offering model portfolios.

Important Considerations

While secured ETNs significantly reduce the issuer credit risk inherent in traditional ETNs, investors should remain aware of:

• Liquidity: Trading volumes might vary, potentially affecting liquidity.
• Transparency and Due Diligence: Investors should carefully evaluate the underlying collateral and risk management structures of secured ETNs.
• Regulatory Considerations: Custodial and regulatory nuances can differ across jurisdictions, requiring thorough understanding and compliance.

Conclusion

Secured ETNs present a compelling complementary channel for the distribution of model portfolios. Offering reduced credit risk through collateralization, global accessibility, and customization, secured ETNs provide strategic value to investors who face challenges accessing traditional vehicles like ETFs, UCITS, mutual funds, or UMAs. As wealth management evolves, secured ETNs will likely play an increasingly vital role in broadening investor access and delivering sophisticated, personalized investment solutions.