ETRACS 2x Leveraged MSCI USA ESG Focus TR ETN (ESUS)

Overview

ESUS is a financial instrument designed to provide investors with leveraged exposure to the MSCI USA ESG Focus Index. This index consists of large- and mid-cap companies that display positive Environmental, Social, and Governance (ESG) characteristics, while aiming to maintain a risk and return profile similar to the broader market. In selecting its holdings, the index applies initial screening criteria to exclude companies engaged in activities like tobacco production, controversial weapons manufacturing, fossil fuel extraction, and thermal coal power generation. The investment strategy of ESUS emphasizes optimizing its portfolio to enhance ESG factor exposure without straying far from a market-like investment experience, albeit with the application of certain constraints. It's important to note that ESUS operates as an Exchange Traded Note (ETN), implicating the credit risk of the issuing entity, UBS, and is structured to offer a 2x leveraged bet on its underlying index with quarterly resets. Given its leveraged nature and the mechanism of quarterly resets, it is advised that ESUS is not suitable for long-term holding if one expects consistent index leverage performance on a daily basis.

Products and Services

• Leveraged Exposure to the MSCI USA ESG Focus Index

  ESUS provides investors with a leveraged (2x) exposure to the MSCI USA ESG Focus Index. This index is comprised of U.S. large- and mid-cap companies that are identified based on their positive ESG characteristics. The instrument's goal is to duplicate, before fees and expenses, twice the daily performance of its underlying index. However, due to the nature of leveraged investments and the quarterly reset feature, the performance objectives may not align with long-term investment horizons, making ESUS more suitable for tactical, short-term strategies.

• Quarterly Reset Mechanism

  The ETN features a quarterly reset mechanism that adjusts the leverage level back to 2x at the start of each quarter. This design is intended to limit the impact of compounding on performance over time, which can be especially pronounced in volatile markets. However, investors should be aware that this mechanism means the ETN's leverage is not intended to provide precise 2x exposure to the index's performance over periods longer than a quarter.

• Screening and Optimization for ESG Factors

  In constructing its portfolio, ESUS applies a screening process to exclude companies involved in certain activities deemed negative from an ESG perspective, such as tobacco, controversial weapons, fossil fuel extraction, and thermal coal power generation. Following this initial screening, the portfolio is optimized to maximize ESG factor exposure while maintaining an overall investment profile that resembles the broader market. This approach aims to offer investors the opportunity to participate in the financial performance of companies with positive ESG practices without significantly diverging from the market's general risk and return characteristics.

• Credit Risk of Issuer

  As an Exchange Traded Note (ETN), ESUS bears the credit risk of its issuer, UBS. This means that the investment is subject to the risk that UBS may be unable to meet its payment obligations under the terms of the ETN. Potential investors should consider this credit risk as part of their overall evaluation of an investment in ESUS.