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
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
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 (
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
. 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
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
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 (
) 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 (
) and PowerShares S&P 500 BuyWrite Portfolio ETF (
) - 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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