Credit Suisse launched a new exchange-traded note (ETN) last month that offers investors exposure to price movement of gold in addition to monthly income distributions. The Credit Suisse Gold Shares Covered Call ETN (GLDI) is the first gold fund in the US that deploys a covered call strategy.
GLDI is linked to the Credit Suisse NASDAQ Gold FLOWS 103 Index, FLOWS stands for Formula Linked Over Write Strategy), a benchmark representing a hypothetical rolling covered call strategy (also known as buy-write strategy) on a notional long position in SPDR Gold Shares (GLD). The fund simultaneously sells out of money call options on the open positions on a monthly basis with a strike price that is approximately 103 percent of the price of GLD.
The advantage of this strategy is that GLDI generates periodic (monthly) cash income from the sale of options (in the form of premiums) that a direct long-only strategy would not, and helps offset losses when market price of gold is falling. However, in a rising market, profits generated by the long positions in the underlying asset (GLD in this case) can be limited if the sold call-options become ‘in the money,’ and the profits will be capped at three percent per month. This makes the product ideal for investors keen to preserve their capital from downside risks while seeking some regular income. Also gold-linked funds tend to offer effective hedge against inflation.
The average annualized income distribution from the investment strategy has been calculated at 9.45 percent. The uniqueness of this fund is that it offers income stream in an asset class that is completely devoid of such a phenomenon.
You should be aware that Exchange Traded Notes are unsecured senior obligations, and in CS’s Nassau branch. Hence they represent a credit risk (i.e. default risk, if CS ever faced bankruptcy, investors will lose entire investment) though unlike ETFs, they have no tracking errors.
The fund has mopped up more than $25 million in assets since its launch in the end of January, but it’s still too new of a fund with little average volume to pass judgment. I will revisit this idea again at some point in the future.
GLDI has an expense ratio of 0.65 percent annually.
Disclosure: No holdingsContact Ulli