PBP Invesco S&P 500 BuyWrite ETF

Silver has been performing terribly of late owing to weakening overseas trends and slack demand. An increasing appetite for equities over commodities, feeble Chinese growth and a possible sell-off by the central bank of the still struggling Cyprus have weighing on the silver prices.

This is especially true in the backdrop of the strengthening dollar and continued bullishness in the stock market, two conditions that are pushing precious metals down across the board. In fact, silver bullion has plunged about 24% in the year-to-date time frame and is easily underperforming the broad market, signaling that the bear market for silver may be continuing in the near term (read: Time to Buy Silver ETFs?).

This sentiment has shifted investors’ attention to dividend-focused stocks and ETFs that have been outshining sliver for some time. After all, precious metals are notorious for their lack of dividends and current income, and without strong price moves to the upside, the appeal of the asset class is definitely dulled.

However, this trend could be changing thanks to a new exchange-traded product from Credit Suisse. The company just launched the Silver Shares Covered Call ETN (SLVO) which could be the combination of stability and yield that many investors have been waiting for in the silver market.

SLVO in Focus

This new ETN is linked to the return of the Credit Suisse NASDAQ Silver FLOWS 106 Index. This benchmark looks to utilize a covered call investment strategy on a notional investment in the iShares Silver Trust ETF (SLV).

Basically, the product will hold a notional long position in SLV while at the same time, will notionally sell out of the money call options on the position on a monthly basis. With this process, any premium received over the notional trading costs is paid out to investors.

The process is done by holding a notional position in SLV and then selecting the strike price roughly 40 days from expiration, usually focusing on calls that are 6% 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 (read: 3 Commodity ETFs Still Going Higher).

After that, SLV 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.

Investors should note that the product will charge an annual fee of 65 bps, which is significantly higher than ‘pure’ silver products like SLV and SIVR. However, this expense could be offset by the yield as the product is expected to make a monthly distribution thanks to the covered call strategy.

The strategy does not provide protection from losses resulting from a decline in the value the SLV shares beyond the notional call premium. So, this is by no means a sure thing, just a potential way to obtain income with a precious metal investment.

Investors should also remember that this product is structured as an ETN as opposed to an ETF. Therefore, it would be subject to credit risk of the underlying issuer. However, the structure also means that the note will not will not have a tracking error, an important consideration (read: ETFs vs. ETNs: What’s The Difference?).

Can it Succeed?

Many investors have still not embraced ETN investing due to some credit risk from the underlying institution. However, if investors can get through this credit issue and focus in on the yield, SLVO could be an intriguing and undoubtedly a novel choice for silver investors (see more in the Zacks ETF Center).

According to Greg King, head of exchange traded products at Credit Suisse, “covered call strategies are designed to enhance yield in exchange for sacrificing part of the upside of an investment position. SLVO seeks to provide investors and their advisors an interesting new way to introduce monthly cash flows into their portfolios”.

The addition of this ETN also expands Credit Suisse’s covered call strategy product line-up to two. Three months ago, Credit Suisse launched Gold Shares Covered Call ETN (GLDI) that follows a similar strategy on gold investments. The product has gathered about $25 million since its inception (read: Gold ETFs in Focus: When to Consider GLDI).

Apart from this, there are two other covered call products — Barclays iPath S&P 500 BuyWrite Index ETN (BWV) and PowerShares S&P 500 BuyWrite Portfolio ETF (PBP) — targeting the broad market. Currently, both cost investors 75 bps per year but PBP is far more popular with more than $220 million in AUM.

Given this overview, it is hard to say how successful the new ETN from Credit Suisse will be. If the precious metal market continues to flounder though, investors could definitely see some big inflows from concerned investors who are seeking lower risk alternatives with higher yields.

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IPATH-CBOE SP5 (BWV): ETF Research Reports
 
GOLD-SH CVD CAL (GLDI): ETF Research Reports
 
PWRSH-SP5 BUYWR (PBP): ETF Research Reports
 
ETF-SILVER TRST (SIVR): ETF Research Reports
 
ISHARS-SLVR TR (SLV): ETF Research Reports
 
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