Royal Bank of Canada has elbowed its way into a fast-growing sector of the retail structured-products marketplace with its recent offering of non-principal-protected notes.

It is the second bank among the Big Six — after National Bank of Canada — to grab a piece of the action. RBC filed its prospectus in late January to raise up to $2 billion in medium-term notes for which return is linked to the performances of certain indices, equities, debt instruments, commodities and/or foreign exchanges.

NPPNs, in general, offer enhanced returns, assuming the underlying securities or indices increase in value. If, for example, the index on which returns are based increases, a mutiplier is applied to boost returns. If the index loses value, the multiplier is not applied. But unlike principal-protected notes, there is no guarantee investors will get their capital back when the note matures.

As part of the $2-billion shelf filing, RBC is now seeking a maximum of $100 million for a product whose return is linked to a basket of commodities. The AdvantageOptimizer Accelerated Commodity Securities Series 1 note will base its return on the performance of five commodities — aluminum, copper, lead, nickel and zinc. The notes will be sold through Toronto-based FundServ Inc.

The notes have a term of four years — they mature in March 2011 — and the amount that investors will receive at maturity is a function of how well the basket of five commodities has performed over the period.

The return will be set at three times the return of the basket of commodities — provided that it’s positive. If there is a loss over the period, investors will receive 100% of the decrease in the basket of commodities.

Along the way to maturity, inves-tors won’t receive any interest or other payments.

For example: if the weighted average return of the five commodities is 12%, investors will get their principal back, plus an extra return. In this case, the extra return would be 12% times three — or 36%. That extra return is applied to the amount initially invested. So, on a $10,000 investment, the investor would receive $3,600 plus the return of principal — or a total of $13,600.

On the other hand, if the weighted average return of the five commodities is negative, then the multiplier won’t come into effect. Instead investors will receive less than the amount they originally invested, reflecting the loss in the value of the underlying portfolio.

But despite the potential return boost, some financial planners are less than enthusiastic about this type of product.

Adrian Mastracci, portfolio man-ager at Vancouver-based KCM Wealth Management Inc. , says he doesn’t favour such investments in general. “In my view, if a client wants to be invested in equities, I’d say, ‘Let’s go and get the equities.’ And if they want fixed-income, I’d say, ‘Let’s go and get the fixed-income’,” he says. “In those cases, I have true equities and the true debt, which allows me to rebalance, buy more or sell. With such [NPPN] products, you don’t have that flexibility.”

In opting to sell NPPNs, RBC is following the lead set by National Bank.

Last year, National Bank filed a short-form prospectus that allowed it to raise up to $2 billion in medium-term notes over 25 years. So far, the bank has completed two deals and has four others currently on the market.

Last October, National Bank raised $4 million for CI Oil Sands and Energy EARNS. (The acronym is for “enhanced accelerated return note securities.”)

In the CI EARNS deal, investors gain 1.5 times any positive return from the basket of oil and gas stocks managed by Toronto-based CI Investments Inc. On the other hand, they will take 100% of any negative return.

National Bank later followed up with a $6-million offering for S&P/TSX Enhanced Return Bear Note Securities.

Of the four deals currently on the market, three are known as “re-verse convertibles.” Each investment matures in one year, and return is tied to performance of one of three underlying stocks — Bombardier Inc., Goldcorp Inc. and Suncor Energy Inc.

Investors receive a high coupon rate but don’t share in the appreciation of the underlying stocks over the 12 months following their investment. Instead, the maximum return is capped at the coupon rate.

@page_break@Conversely, the losses could equal the amount originally invested — offset by the high coupon. This investment is suited for those investors who believe that there will be no change in the stock price over the next 12 months.

National Bank’s fourth deal is Harbour Foreign Equity EARNS. The note runs for eight years and promises investors 1.5 times the gain in the underlying fund — in this case, CI’s $500-million Harbour Foreign Equity Corporate Class — if it increases in value over the next eight years. IE