Late last year, UBS introduced two exchange traded notes (ETNs) that gave investors the ability to play the "risk on" and "risk off" trade in the market. The ETNs are linked to the daily performance of The Fisher-Gartman Risk Index. The index is composed of a mix of long and short positions in various asset classes, and depending on the ETN (risk on or risk off) it will attempt to gain with the current market environment.

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Risk on
The ETRACS Fisher-Gartman Risk On ETN (ARCA:ONN) is made up of a mix of positions where overall value is expected to increase when the outlook on the market and economy are bullish, and vice versa when the outlook is negative. The tracking fee for the ETN is 0.85% and the annual distribution rate is 1%. The target weighting for positions is 150% for the longs and 50% for the shorts. Currently, the largest long positions are crude oil, Brent oil and the euro. The three largest short positions are the 10-year Treasury note, Japanese yen and German bund.

From Nov. 29, 2011 through Apr. 2, 2012, the SPDR S&P 500 ETF (ARCA:SPY) rose by 18.5% and ONN saw an increase of 12.1%. The reason for the underperformance could be the fact the three largest shorts did not take big hits and fell as the stock market rose.

SEE: Exchange Traded Notes - An Alternative To ETFs

Risk off
The ETRACS Fisher-Gartman Risk Off ETN (ARCA:OFF) attempts to provide investors with the ability to make money when the outlook for the market and economy is negative. The major difference is the weightings in which the longs are only 50% and the shorts are 150% of the allocation. The tracking fee is also higher at 1.15% per annum and there is no set annual distribution.

From April 2 to Jun. 4, 2012, the SPY fell by 9.7% and OFF rose by 26.1%, a major outperformance for the ETN. The top shorts in the ETN are crude oil, Brent oil and the euro. Top longs are the 10-year Treasury note, Japanese yen and German bund. They are a mirror image of the top holdings for ONN.

To put things into perspective, it is important to analyze how OFF performed during the market rally (Nov. 29, 2011 to Apr. 2, 2012). The ETN lost 13.8%, but not nearly as bad if one were short the SPY. Another way to view the two ETNs is by their performance since the two began trading on Nov. 29, 2011. ONN is down 8.1% and OFF is up 4.5%. During the same time period SPY is up 6.2%.

SEE: Too Many Mutual Funds?

The Bottom Line
What the returns, so far, for the two ETNs indicate to me is that over a longer period of time they will not necessarily track the risk trades closely. This is due to the risk-on and risk-off trade flip-flopping done so often over the last few months. I do not see this back and forth trend ending anytime soon. So as investors, it is best to leave ONN and OFF to traders and market timers that have the expertise and risk tolerance for the above average volatility.

At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.
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