Covered Call ETN Strategy: A Better Way To Play Gold and Silver?

strategyTrading in precious metals like gold and silver has been quite poor as of late. These two key commodities have been beaten down significantly in 2013, underperforming broad stock markets by a pretty wide margin.

In fact, gold, represented by (NYSEARCA:GLD), is down about 20% YTD, while silver, as represented by (NYSEARCA:SLV), has plunged by nearly 30% in the same time frame. And given that many of the reasons for this slump are still impacting the market—such as a strong dollar and a huge demand for equities—one might expect some more short term weakness in this corner of the investing world (read 4 Ways to Short Gold with ETFs).

Equities any better?

Trading in miners of these precious metals haven’t been any more favorable, and if anything they have been worse, as these have underperformed their bullion cousins year-to-date. This is because these miners trade as a leveraged play on their underlying metal, so in bull markets they tend to outperform while bear markets usually lead to steep losses, like what we have seen as of late.

The most popular gold mining ETF, (NYSEARCA:GDX), has lost a whopping 40% in the year to date time frame, while the most popular silver mining ETF, (NYSEARCA:SIL), is down about 43%, suggesting pretty catastrophic losses across the space. Given this, investors might feel like they have few options in the gold and silver market that can hold up well, although a recent series of launches may be changing that.

Covered Call ETNs:A better way to play?

Recently, Credit Suisse launched two ETNs that seek to give investors a new way to play the precious metals market. These employ a covered call strategy which looks to provide investors with a great deal of income while still offering some exposure to the metal.

These products currently trade under the symbol of (NYSEARCA:GLDI) for gold exposure and (NYSEARCA:SLVO) for silver access. While both haven’t exactly performed well from a performance standpoint in their short histories, they do pay out solid levels of monthly income.

In fact, GLDI has a 12 month yield of about 6.9% while SLVO is currently sporting a low double digit yield. Obviously, with payouts like this, any capital losses are dulled, suggesting that these could be lower risk plays on metals, at least in the current bear-to-neutral market.

However, it is worth noting that both of these products do have paltry volumes which could result in higher bid ask spreads and increase trading costs. This makes these notes a bit on the pricey side as their expense ratios already come in at an elevated level of 0.65% (readCombine Silver ETFs and Covered Calls with SLVO).

Still, in flat or down markets, a covered call strategy can be a very interesting play, and one that can outperform ‘regular’ gold and silver ETF investments. So if you are still uncertain about the precious metal world in the near term, consider taking a look at SLVO or GLDI for a way to tackle precious metal ETF investing with a potentially higher level of income, and a lower amount of risk.

For more on recent trading in the precious metal market, and the covered call ETNs that may be able to offer better exposure, watch our short video on the topic below:

This article is brought to you courtesy of Eric Dutram From Zacks.

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