Credit Suisse Plans Covered-Call Gold ETN

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January 17, 2013
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GLDSPDR Gold
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Credit Suisse serves up a covered-call riff on the physical gold market.

Credit Suisse, the bank that recently agreed to sell its European ETF operations to iShares, filed paperwork with regulators to market a gold-linked ETN that will feature long exposure to physical gold coupled with an overlay of call options, a so-called covered-call strategy that could milk extra returns out of a 12-year gold rally that may be growing long in the teeth.

It’s not clear when the Credit Suisse Gold Flows Index ETN will come to market, but prospectuses detailing exchange-traded notes typically surface just prior to the actual launch of a given security, and the regulatory paperwork suggests that ETN’s rollout could come as soon as the end of this month. The ETN will have its primary listing on the Nasdaq and GLDI will be its ticker, the prospectus said.

The ETN, which will come with an annual fee of 0.65 percent of assets, or $65 for each $10,000 invested, will have notional exposure to the bullion ETF SPDR Gold Shares (NYSEArca: GLD) while notionally selling monthly “out of the money” call options, according to the paperwork.

It’s anybody’s guess what the future holds given the lengthy aftermath to the market crash of 2008, but doubts in some corners of the financial market are beginning to surface about whether gold’s long run may be running its course. GLDI might be the perfect security for investors who are on the fence about that issue, as it represents a somewhat neutral view on gold.

Premiums on the notional sale of the call options will be received monthly, the company said. The ETN is designed to enhance current cash flow through those premiums in exchange for giving up any gains beyond 3 percent per month.

Apart from those premium payments softening the blow of a sell-off in GLD, nothing about the security is designed to provide downside protection.

The ETNs, which will mature on Feb. 2, 2033, are subject to early redemption or acceleration “in whole or in part at any time,” according to the prospectus.

They will have an initial “principal amount” of $20 per share.

ETNs are senior unsecured obligations—in this case of Credit Suisse’s Nassau branch. Unlike ETFs, they have no tracking error, but, also unlike ETFs, they represent a credit risk. For example, if Credit Suisse ever faced bankruptcy, holders of GLDI would likely lose their entire investment.

 

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