Most Innovative New Income ETFs

January 13, 2014

2. Credit Suisse Gold Shares Covered Call ETN (GLDI | 45)

GLDI tracks an index that uses a covered-call strategy to add income to gold, an asset that’s typically devoid of yield.

The ETN offers the returns of a covered-call strategy comprising shares of the SPDR Gold Trust (GLD | A-100), and one-month call options with a strike price of 103 percent of GLD, according to our ETF Analytics data. GLDI pays a monthly variable coupon based on the sale of covered-call options within the index.

In essence, what GLDI does is offer investors another alternative with which to express a view on gold. By design, if gold prices decline, and GLD share prices drop below the strike price of the calls, the call options never get exercised. The investors get the cost of that covered call back and added to their returns.

GLDI’s strategy helps offset some of the downside relative to GLD if gold prices tumble, mitigating the risk associated with gold. In fact, since inception, GLDI has slid some 23 percent—roughly 3 percentage points less than GLD in the same period, but still a sizable decline.

“GLDI takes one of the main critiques of gold—that it doesn’t have a yield—and adds yield by selling covered calls,” Baiocchi said. “In a gold market like we saw in 2013, this was of little consolation, but in a methodical uptrending market, it will rule the roost.”

As Credit Suisse, the issuer of the ETNs, puts it in its website, “In a consistently upward-trending market or in an extremely volatile market, a covered-call strategy can underperform a long-only investment in the underlying asset, because it will fail to capture all of the potential upside and can miss out on significant gains.”

“If the underlying asset price declines, a covered call strategy may result in a loss,” Credit Suisse said.

GLDI has an annual expense ratio of 0.65 percent, or $65 for each $10,000 invested. GLDI came to market on Jan. 29, 2013.



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