Expense ratio of 2.19% is certainly high but the product sports an excellent yield of 13.2% currently. The ETF returned 37.1% in 2013 and is up about 6.5% in the last 3 months.
Investors should however remember that this asset class may perform worse than the broader market during periods of prolonged market turmoil.
During the financial crisis, private equity space and this product had a terrible performance. So, this investment will need to be monitored carefully.
Covered Call ETN–A Safer Way of investing in and extracting income from Gold
Many investors avoid holding gold in their portfolios since it does not generate any yield. I believe that investors should have a small exposure to gold as the shiny metal has low correlations to stocks, in addition to being a safe have asset and an inflation hedge.
After an ugly performance last year, gold has rebounded strongly this year—up more than 12%. However a rising US dollar and low inflation may keep the gains in check. That said, long-term outlook for precious metals doesn’t look bad given rising middle class wealth in China and India.
Credit Suisse Gold Shares Covered Call ETN (GLDI) is interesting and safer way to play the precious metals, while receiving an excellent income flow. (Read: Gold ETFs meet covered calls in GLDI)
This ETN tracks the Credit Suisse NASDAQ Gold FLOWS 103 Index. It uses a covered call investment strategy on a notional investment in the SPDR Gold Trust ETF (GLD).
Basically, the product invests in GLD and sells out of the money call options on the position on a monthly basis, to add income to the position. So if gold prices slide, this product will provide protection to the investors.
Upside potential for the notes is rather limited (beyond 3% monthly move) due to covered calls; but I don’t expect a huge surge in gold this year.
The product has an expense ratio of 65 bps and yields 11% as of now. Investors also need to note that trading volumes for the product are low resulting in high trading costs.
The note outperformed the precious metal by 3 bps last year—not great but not bad at all considering the huge yield of the product compared to zero yield by the metal. The product has returned more than 9% this year.
The Bottom Line
Products with fat yields in general have a poor outlook in the current environment. But these unconventional ETFs not only pay out double-digit yield but they have also been beating the market of late and may continue to do so in the coming months.
This article is brought to you courtesy of Neena Mishra From Zacks.com