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SLVO: A Safer Way To Invest In Silver

Summary SLVO is an ETN issued by Credit Suisse, benchmarked to the Credit Suisse NASDAQ SilverFLOWSTM 106 Index, a proprietary index designed to track a covered call strategy. The Credit Suisse NASDAQ Silver FLOWSTM 106 Index notionally sells approximately 6% out of the money notional calls each month while maintaining a notional long position in SLV shares. The exchange traded note can potentially lower the downside risk over owning SLV shares outright with the approximately 14% distribution representing the covered call premiums. Unlike in the world of stock and bond investors, the precious metals world has a wide variety of investors, ranging from individuals and institutions who just want to have precious metals exposures, to bullion purists who believe the only “real” way to invest in precious metals is to buy bullion that you hold in your hands, in your safe. This investment… is not for them. This ETN is for someone who would currently invest in silver via an ETF like the iShares Silver Trust ETF (NYSEARCA: SLV ) or the Sprott Physical Silver Trust (NYSEARCA: PSLV ) or a silver mining stock and just wants a bit more income. What Is the Credit Suisse Silver Shares Covered Call ETN (NASDAQ: SLVO )? SLVO is an exchange traded note benchmarked to the Credit Suisse NASDAQ Silver FLOWSTM 106 Index. The index is designed to replicate a strategy where you would write short term options against shares of SLV, the silver ETF. Specifically, Credit Suisse describes the index as follows: The Index was created by Credit Suisse and is published and calculated by NASDAQ OMX. Call options with approximately 40 days to expiry are sold over a 5-day period each month within the Index. Approximately 30 days later, those same call options are repurchased over a 5-day period. The notional premium received, net of notional transaction costs, is paid out following the repurchase of the options on or about the 25th of the month. Source: Credit Suisse Below is a graphical representation of the Index. The Index and ETN were launched approximately 2 years ago, on April 16, 2013. The ETN charges a .65% annual fee. Performance Anyone who has invested in precious metals over the last 5 years, has most likely either lost money, or is sitting on paper losses. Over the last 5 years, investments in silver have lost approximately 22%. If you were unfortunate enough to buy silver at the peaks in 2011, you would have lost more than 60% of your investment value. There are a variety of reasons for the meteoric rise and fall for silver which are not the focus of this article, however I implore you to read an article I recently published dealing with this exact issue here. “Why $8 Silver is Just as Likely.” Theoretically, a covered call strategy will be able to generate more income and outperform a simple buy and hold strategy in falling and flat markets. In order to generate the incremental income, you are giving up your upside over the strike price of the call options. In more volatile markets, writing call options generally makes sense as you are able to monetize the risk you are already taking by holding the underlying investment. Where you end up losing is during rising markets and your investments are called. This is exactly what happened if you held over from inception of the fund. You can see that below. If you invested $10,000 in each, SLV and SLVO at SLVO’s inception, your SLV holding would be worth $6,212 and your SLVO holding would be worth $5,541. The underpformance would come from the few sharp rebound spikes silver went through in the fairly aggressive declines of 2013 where SLVO would pay more to buy back the calls. (click to enlarge) In a more orderly selloff as we had seen over the last year, the numbers look different, and the covered call strategy saved you some losses, particularly as you would purchase back, or let the covered calls expire worthless. If you purchased and held SLV 1 year ago, your $10,000 would be worth $7,191 today. An SLVO investment of that same $10,000 would be worth $7,306. Had you taken your distribution in cash and not reinvested it, I suspect that number would be slightly higher as your reinvestments were worth less today, at the lows of the year. (click to enlarge) So… Is this right for you? Perhaps. If you want to be invested in silver, and would not mind giving up a bit of upside in order to monetize the risk and receive income, you should consider this ETN. The strategy makes sense and the annual expense of .65% is certainly not outrageous, especially if you consider the transaction costs you would incur if you wrote covered calls on your own month in and month out, both selling to open and buying to close. The potential downside here and something that we did not discuss is the product structure. This is an ETN, an exchange traded note, and not an ETF, an exchange traded fund. Unlike an ETF, ETNs are not shares of the actual underlying funds, ETNs are credit obligations, like bonds of the underlying issuer, whose value tracks a specified index. In the event of a default, owners of the ETN would be lining up for the settlement in the liquidation of the issuer. While Credit Suisse is a sound institution, at least today, this is an additional credit risk that you should take into account. If you are not comfortable with taking on additional credit risk, you can consider other covered called strategies such as the GAMCO Global Gold, Natural Resources & Income Trust (NYSEMKT: GGN ) and the BlackRock Resources & Commodities Strategy Trust (NYSE: BCX ). For more discussion about risk faced with ETN investing, feel free to read my previous ETN articles such as RBS ETNS: When A Good Idea Alone is Not Enough . Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: None of the information discussed should be considered investment advice or a solicitation to buy or sell any securities. Please consult your investment advisor for specific recommendations.

GGN: Now Could Be A Good Time To Pick This High Yielder Up

Summary GGN invests in gold and natural resources, with an option overlay and the ability to use leverage. GGN’s is trading at an over 5% discount to its NAV, despite a history of trading at or above NAV. That could make now a good time to consider this relatively risky high yielder. GAMCO Global Gold, Natural Resources & Income Trust (NYSEMKT: GGN ) isn’t for the feint of heart. But if you can handle a little risk and have been looking for a way to add hard assets to your portfolio, now could be a good time to consider this closed-end fund, or CEF. And with an over 12% yield, paid monthly, you’ll be getting a nice income stream, too. Not your average bear GGN isn’t your run of the mill gold fund. This CEF’s portfolio is roughly 50% metals and mining stocks and 33% energy and energy services stocks. So roughly 80% of the fund is in sectors that have been, you could say, out of favor. Oil and related stocks have been the most recent market pariahs taking a toll on this CEF’s market price. However that doesn’t mean that you should avoid these assets. Hard assets and related industries can provide a valuable hiding place when markets are in turmoil or when inflation is rising quickly. They are often seen as a safe haven. It’s this diversification opportunity that leads investors to include some hard assets in their portfolios. So, the current malaise in mining and energy stocks can be looked at as a reason to avoid the sectors, or as a Blue Light Special opportunity for adding hard assets to your otherwise diversified portfolio-Just in case. But there’s more to GGN than just a focus on hard assets. It can also make use of leverage ( around 7% or so recently ) and an option overlay strategy. The primary goal of the fund is to provide investors with a high level of income, capital appreciation is a secondary goal. Thus, the fund writes options on the stocks it owns. And since volatility is the norm in the precious metals arena, there’s plenty of opportunity to take advantage of the options strategy to create income. Right now GGN pays $0.07 a share every month. That was recently cut from $0.09, a fact that should prepare you for income volatility here. However, even with that dividend cut, the CEF still pays a handsome yield of around 12%. Thus giving you high yield exposure to a broad asset class that could provide a safe haven if the markets tank. The leverage piece of the puzzle is more difficult to reconcile with the fund’s income objective. However, with rates historically low, GGN is taking advantage of an opportunity to access cheap debt. That’s a double edge sword, since leverage can enhance performance on the upside and exacerbate losses on the down side. There’s been more down than up lately, so it’s a good thing that leverage is pretty light at around 7%. This is a piece worth watching if you decide to step in here. That said, sister closed-end fund GAMCO Natural Resources, Gold & Income Trust (NYSE: GNT ) is another option if you want to avoid leverage, but it’s yield is a couple of percentage points lower. I’ll write about this CEF shortly. The real opportunity While owning an income producing security in out of favor industries is a good reason to be looking at GGN, it doesn’t get at the real opportunity right now. And that’s the discrepancy between GGN’s share price and its net asset value, or NAV. Historically, GGN has traded at or slightly above its NAV, with the Closed-end Fund Association pegging the average premium over the past five years at a little over 2%. But right now GGN is trading at discount of around 5% or so. The reason for this is likely two fold. First, investors have been selling off anything related to oil over the last six months or so as oil prices have fallen precipitously. That includes GGN. Second, year-end selling to lock in losses to offset gains elsewhere for tax purposes. GGN is a prime target for tax less selling since last year was a less than stellar one for the fund; the fund’s share price was down nearly 25% in 2014. (Total return, which includes distributions, was a loss of roughly 15%.) That’s not a guarantee that you’ll see a 7% price jump as 2015 progresses in addition to a 12% yield. But it does mean that GGN’s shares look like they are being put on an even deeper sale than the two sectors on which it is focused. So, if you want to own some hard assets “just in case,” now is a good time to take a look at GAMCO Global Gold, Natural Resources & Income Trust. That’s especially true if you have an income bent and prefer to outsource at least some of your investment activities.