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New ETNs Dive Into IPO Mania

NEW YORK ( TheStreet) -- If ever any exchange-traded products were going to be fodder for skeptical debate, the new eTracs Internet IPO ETN (EIPO) and the 2X Leveraged eTracs Internet IPO ETN (EIPL) would be it. UBS (UBS), the bank underlying the notes, came to the market very quickly to capitalize on the newest mania of social media and new internet IPOs.

Each ETN tracks the same index with the only difference being the leverage for EIPL. The current index is a "who's who" of all most popular recent Internet IPOs. Some of the prominent holdings are LinkedIn (LNKD), Pandora (P) and Open Table (OPEN). There are also foreign stocks in there like Russian search engine Yandex (YNDX) and Chinese social networking company Renren (RENN).

The indices rebalance monthly and can also be reconstituted monthly so a company like Zillow (Z) could be in the index as soon as the July 31 rebalance/reconstitution. Once a company has five trading days (with volume) under its belt it is eligible for consideration for the end of that month. Obviously this means the index will not capture any first-day frenzies but ensure the index will remain on top of the trend.

It seems pretty obvious that UBS wants the fund to be able to quickly own any of the other companies that are candidates for IPO like Facebook, Twitter, Groupon, Kayak or any other companies that will come on the horizon.

In looking at an exchange traded note it needs to be understood that the product represents an unsecured debt obligation of the issuer, again in the case UBS. The notes don't actually own anything, they simply promise to replicate the basket they are tracking. ETNs do a good job of tracking their respective underlying indices but a failure of UBS, an extremely remote possibility, would mean a wipeout for note holders. The expense ratio for both of the notes will be 0.58% and of course there will be no dividends paid.

In the few days of trading so far there has been essentially no volume, so the potential volatility is not evident in the trading. But both notes stand to be incredibly volatile. Since its debut in May, Renren is down 43%, in 2010 Open Table was up 163% and in its short time trading LinkedIn has doubled from its IPO price, then fell 30% in its first month of trading and subsequently rallied 62% from the June low.

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