Gold investing has seen a very rocky road over the past few
months. The metal was poised to once again beat out the S&P 500
in 2012, but an extremely weak end to the year put a stop to
that.
Now that we are well into 2013, the trend hasn’t been much
better for gold bugs, with the precious metal falling by the
wayside. In fact, gold has underperformed by about 500 basis points
so far this year, signaling to many that the bear market for gold
may be continuing.
This could be especially true if investors continue to embrace
dividend products as a substitute for gold as a safe haven play.
These dividend stocks and ETFs have been stealing gold’s thunder
for some time as gold is notorious for its inability to pay out
dividends which forces a focus on capital appreciation, something
that has been minimal at best in recent months (read Gold ETFs: Is
the Sell-Off Overdone?).
However, this trend could be changing thanks to a new
Exchange-Traded Product from Credit Suisse. The company just
released the Gold Shares Covered Call ETN (GLDI)
which could be the combination of stability and yield that many
investors have been waiting for in the gold market.
GLDI in Focus
This new ETN is linked to the return of the Credit Suisse NASDAQ
Gold FLOWS 103 Index. This benchmark looks to utilize a covered
call investment strategy on a notional investment in the
SPDR Gold Trust ETF (GLD).
Basically, the product will hold a notional long position in GLD
while it will simultaneously notionally sell out of the money call
options on the position on a monthly basis. With this process, any
premiums received over the notional trading costs are paid out to
investors.
The process is done by holding a notional position in GLD and
then selecting the strike price roughly 40 days from expiration,
usually focusing in on calls that are 3% out of the money. These
are then sold over the next five days while the cash received for
selling the calls is held in the portfolio.
After that, GLD is sold notionally to buy back the calls over a
period of about five days. Then, roughly a week before expiration,
investors are paid out net cash as a monthly distribution before
the process starts all over again (see Invest Like Morgan Stanley
with These 5 Commodity ETFs).
The process is somewhat complicated but Credit Suisse has a
handy chart of the process, which we have taken from their fact
sheet and reproduced below:
It should also be noted that the product will
charge investors 65 basis points a year. This is a level that is
significantly higher than what we see in pure-gold products like
GLD or IAU, but obviously the type of exposure in GLDI is much more
complex.
The yield should help to offset this though, as the product is
expected to make a monthly distribution thanks to the covered call
strategy. Currently, Credit Suisse has seen a 9.45% annual yield
over the past year, with a big variability from month to month
thanks to the shifting returns inherent in the covered call
market.
Investors should also remember that this product is structured
as an ETN as opposed to an ETF. While this isn’t a big deal, it
does mean that the product will not actually hold GLD or the
covered calls—hence the constant talk of ‘notional’ investments—but
it will not have tracking error either (see ETFs vs. ETNs: What’s
The Difference?).
Can It Succeed?
Many have not embraced this style of exchange-traded investing
as of yet, thanks to some credit risk from the underlying
institution (in this case UBS), which has scared off some
investors. However, this is a minor worry, and it makes somewhat
difficult or illiquid strategies more investor-friendly
overall.
So if investors can get by this credit issue and focus in on the
yield, GLDI could be an intriguing, and undoubtedly novel, choice.
It is one of the only exchange-traded ways that investors can
provide their portfolios with some measure of income in the gold
space, though it could cap gains if gold takes off in short-time
periods.
Still, it will be interesting to see if this method catches on
with investors and if inflows follow for GLDI. There are only two
other covered call products out there right now—BWV and PBP—and
these target the broad market, so it is hard to say how successful
Credit Suisse’s ETN will be (also see AdvisorShares Files for
Innovative Option-Based ETF).
If GLDI can produce nearly double digit yields in the future, as
it has in the trailing one year, it could be an interesting
precious metal play. This could be particularly true for investors
who like the safe haven properties of gold, but have been put off
by its lack of current income, at least until now.
“Gold is often criticized as a portfolio investment because of
its lack of any yield,” said Greg King, head of exchange traded
products in Credit Suisse’s Investment Bank in a press release.
“Covered call strategies however, are designed to enhance yield in
exchange for sacrificing part of the upside of an investment
position. GLDI seeks to provide investors and their advisors an
interesting new way to introduce monthly cash flows into their
portfolios.”
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Follow @Eric Dutram on Twitter
Author is long IAU and gold bullion.
IPATH-CBOE SP5 (BWV): ETF Research Reports
SPDR-GOLD TRUST (GLD): ETF Research Reports
(GLDI): ETF Research Reports
ISHARS-GOLD TR (IAU): ETF Research Reports
PWRSH-SP5 BUYWR (PBP): ETF Research Reports
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