Royal Bank of Scotland ETN Alternates 3 Large-Cap Weightings

NEW YORK (TheStreet) -- On Sept. 6, the Royal Bank of Scotland (RBS) rolled out the RBS US Large Cap Alternator ETN (ALTL). The underlying index uses a multi-period momentum strategy to provide exposure to either the S&P 500 Total Return Index, the S&P 500 Equal Weight Total Return Index, or the S&P 500 Low Volatility Total Return Index.

A "Relative Strength Score" is assigned to each of the three large-cap stock weighting methodologies on the last business day of each calendar month. The calculation uses the simple average of the returns for the prior one-month, three-month, six-month, nine-month and 12-month periods. The ETN's index will track the return of the weighting scheme with the highest Relative Strength Score during the following month. The monthly rebalancing takes place at the close of business on the first trading day of the month.

ALTL has an annual investor fee of 1.00%. Additional product information is available in the overview page on the RBS Web site, along with its fact sheet and prospectus .

Analysis/Opinion: RBS supplied hypothetical backtested results for the underlying index as part of the prospectus. The performance graph (shown below) begins Jan. 2, 1992.

Unfortunately, it uses an arithmetic scale instead of a log scale, which distorts the long-term performance characteristics and it shows the results for the index instead of the ETN. A table is also provided, but its data begins a year later (Dec. 31, 1992) and also does not adjust for the 1.00% annual investor fee.

My calculations, based on the data in the prospectus, along with a 1% annual reduction of ALTL's underlying index to account for the investor fee, produced the following results for the period Dec. 31, 1992 to Aug. 29, 2012: The backtested ALTL ETN had an estimated 11.7% annual return with a 16.1% standard deviation. The comparative returns (and standard deviation) of the other underlying indices were 8.3% (19.1%) for S&P 500 Total Return, 10.1% (19.3%) for Equal Weighting and 10.0% (14.2%) for Low Volatility.

It is possible to implement this strategy on a do-it-yourself basis using Vanguard S&P 500 ETF (VOO), PowerShares S&P 500 Low Volatility (SPLV) and Guggenheim S&P 500 Equal Weight ETF (RSP). You can view an analysis of the SPLV on our Invest With An Edge Web site.

However, investors need to weigh the monthly transaction costs, tax consequences and underlying ETF expense ratios against the 1% annual fee and inherent credit risk of ETNs like ALTL. A discussion of those risks is available on our Web site as well.

At the time of publication, the author was long SPLV.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Ron Rowland is the founder and president of Capital Cities Asset Management, a fee-based registered investment adviser in Austin, Texas. He is also the founder and publisher of Invest With An Edge and All Star Investor, where he has been providing market commentary and active investment advice since 1991. Opinions expressed in this article should not be considered personal recommendations to buy or sell any security.