Credit Suisse added a new fund to their lineup yesterday: the Gold Shares Covered Call ETN (GLDI). The fund takes a new approach to gold investing, which has seen a surge in popularity in recent years. The covered call strategy will make GLDI a one-of-a-kind gold fund that may do well to draw in investors who have grown tired of the plain vanilla gold exposure [see also What Can 1 Ounce of Gold Buy?].
The Covered Call Strategy
A covered call consists of going long on an underlying security while selling call options on the same underlying security. This generates additional income (the premiums received from selling options), which helps to offset some losses when markets are falling. When markets are rising, however, the call options sold can come “in-the-money,” offsetting gains generated by the long position in the underlying security.
In the case of GLDI, this ETN will maintain a notional long position in the SPDR Gold Trust (GLD), the world’s second largest ETF. Best of all, holders of GLDI will be entitled to variable monthly distributions to add to the allure of income to their gold investment.
The Dividend Effect
Where this new fund really sets itself apart is by being able to offer an income stream in a space that is completely devoid of such a luxury. “Gold is often criticized as a portfolio investment because of its lack of any yield,” said Greg King, head of exchange-traded products in Credit Suisse’s Investment Bank. “Covered call strategies, however, are designed to enhance yield in exchange for sacrificing part of the upside of an investment position. GLDI seeks to provide investors and their advisors an interesting new way to introduce monthly cash flows into their portfolios.”
It should be noted that the fund’s home page notes that the cash distributions will be variable, so there is no guarantee of a stable yield, but any payout is better than none when it comes to the commodity space. Time will tell how GLDI will fare, but the product bridges the gap between one of the most popular investments in the world, and the income strategy that has become very popular in this low-rate environment, giving it a solid start.
Disclosure: No positions at time of writing.