RBS tiptoes into U.S. ETN market with a splashy product featuring two types of returns.

RBS Securities Inc. a unit Royal Bank of Scotland, launched its first exchange-traded product for U.S. investors, an ETN that’s linked to the S&P 500, but features downside protection should the stock market move into a bearish phase.

The RBS US Large Cap Trendpilot Exchange Traded Note (NYSEArca: TRND) tracks the firm’s proprietary RBS US Large Cap Trendpilot Index, which returns either the performance of the S&P 500 Total Return Index, or the yield of three-month U.S. Treasurys, depending on the relative performance of the S&P 500.

Shifts in TRND’s returns are dictated by its price relative to its 200-day moving average. Investors will earn S&P 500 Total Return Index returns as long as TRND’s price is above the 200-day moving average. Exposure wouldn’t change to T-bill returns until the price fell below the 200-day for at least five days, and vice versa.

The cost of TRND, like its returns, has two tiers, with the equity exposure priced at 1.00 percent of assets under management on an annualized rate, and the downside T-bill exposure costing 0.50 percent on an annualized basis.

Exchange-traded notes differ from the more common ETFs in that ETNs are debt securities backed by the issuer, in this case an RBS unit. Should the ETN issuer go into bankruptcy, the investor loses his stake.

That possibility may loom largely in the minds of some investors who recall that in 2009, the Royal Bank of Scotland was among the major global banking giants to be bailed out by its government.

RBS ended up receiving a total of 45.5 billion pounds from the British government to shore up a balance sheet badly damaged by mortgage-related debt securities that had plummeted in value. At the time, it was the single costliest bailout of any bank in the world.

Credit risk notwithstanding, ETNs enjoy a number of advantages over ETFs — first and foremost is that ETNs don’t have tracking error the way ETFs do. The issuer promises the returns, minus expenses, of the underlying index.

In the case of TRND, an ETF wrapper could end up being the cause of quite a lot of tracking error because shifting holdings back and forth between the S&P 500 and T-bills would be logistically daunting and immensely expensive in terms of costs associated with portfolio turnover.

As RBS states in TRND’s prospectus, its ETN will have no taxable distributions throughout the life of the security. For an investor that means no taxes on the note unless one of three things happen: The investor sells the note; the issuer calls, or retires, the note; or the note matures. TRND matures in December 2040.