US wrap: Struggling real estate sector provides unusual choice of underlying

Issuance numbers have been up and down this week – the latest offering consists of just two products, both principal-protected notes on the Dow Jones Industrial Average. The two products are very similar, although neither product type nor underlying are that common in the market.

Principal protection is a popular feature for the still cautious US investor, but the low interest rates mean issuers struggle to offer them with attractive returns.

The two products offer 100% of any upside in the underlying, but Goldman Sachs has extended the tenor of its product to seven years, a very long maturity for the US market.

Wednesday's issuance, by contrast, was much more varied. There were no principal-protected products but the other common product types – reverse convertibles, accelerated growth and review – all feature.

Barclays has issued a one-year review product on the iShares Dow Jones Real Estate Index Fund. The product has four observation dates, and if the index is at or above its initial level on any of those dates the product will mature early and returns will be between 4% and 16% depending on the date of redemption.

The product has a 75% protection barrier on any fall in the underlying. The product scores a low riskmap of 2.7 and a moderately high overall score of 6.3.

Volatility on the underlying is an annualised 31.5%, which is low and makes for a sound investment. However, using real estate as an underlying is unusual given the uncertainty about the US real estate sector.

Although the sector is still experiencing a slump, US Real Estate Investment Trusts, which are a popular way of investing in the sector and an underlying for many exchange-traded funds, are recovering well. The fund itself is also seeing positive performance, with total returns of 4.5 year-to-date.

Sep 30, 2010

Sep 29, 2010

Source: FVC and SEC filings

For access to analysis of the US structured products market: www.structurededge.com