LSC Commodity ETN Tries to Minimize Risk

The target weights for the various components of LSC are subject to change annually based on any changes in global production. The weightings, as opposed to the target weights, for the index are subject to monthly rebalancing. LSC will charge a 0.75% fee which is much cheaper than the 1.77% charged by RYMFX.

Like most ETNs, LSC will pay no interest -- also it is a debt obligation (all ETNs are debt obligations of the issuer) of HSBC(HBC Quote) that matures in 2023.

There is a potential tax issue to be aware of with LSC. In general terms, futures markets are subject to the 60/40 tax structure, which means you may have to pay taxes even if you have not sold the fund. The prospectus says that the intention is to treat the notes "like pre-paid cash settled financial contracts," which would bypass the 60/40 issue. However, it is possible that in the future the IRS will rule against that concept and the notes would be subject to less-favorable tax treatment.

LSC uses only commodity futures, while RYMFX uses commodity and financial futures. Commodity futures tend to be more volatile than financial futures, which creates the potential for LSC to be more volatile than RYMFX. The ELEMENTS Web site does not provide information on volatility from the backtest, so we can't know which one will be more volatile until LSC gets some time under its belt.

LSC, and for that matter RYMFX, potentially plays an important role in a diversified portfolio. These two vehicles exist because they use a rules-based methodology that has had success in the past and nothing (or very little) to do with the stock market.

Absolute return could play an increasingly important role in portfolio construction because of how poorly domestic index investing has done in this decade. Even more trouble may be ahead.

U.S. indices may continue to do poorly, but putting an entire portfolio into narrower and more volatile themes, like agriculture or emerging markets, would create a risk profile that most folks could not live with. Absolute-return products like LSC can help offset some of that volatility as portfolio construction evolves.