Barclays’ autocallable notes on gold, silver ETFs offer buffered exposure to precious metals

By Emma Trincal

New York, Jan. 14 – Barclays Bank plc’s buffered autocallable notes due Jan. 17, 2025 linked to the least performing of the VanEck Vectors Gold Miners exchange-traded fund and the iShares Silver Trust give investors a chance to get exposure to gold miners stocks and silver in an income-oriented note that comes with a buffer.

The autocallable contingent coupon structure used for this note is very common. However, the use of a buffer in this type of product is not, sources noted.

The notes will pay a monthly contingent coupon of 8.5% per year if each asset closes at or above its coupon barrier, 80% of its initial level, on the related monthly observation date, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par if each asset closes at or above its initial level on any monthly call valuation date after one year.

The payout at maturity will be par unless either asset falls by more than 20%, in which case investors will lose 1% for each 1% decline of the worse performing asset beyond 20%.

Precious and rare

Investors seeking exposure to precious metals often have to wait a while before finding structured notes fitting the bill. Supply is limited for these underlying assets, according to data compiled by Prospect News.

Exposure to gold through the VanEck Vectors Gold Miners – an equity fund – or through the SPDR Gold Shares, which tracks the gold bullion, is the most common setting although notes tied to those ETFs are issued only sporadically. Deals on silver or palladium are rare. Unlike gold underliers, ETFs for those two metals are almost never used as stand-alone underliers.

Bullish call

A buysider said he liked the notes because both underlying are not overly expensive. For moderately bullish investors, the trade offered an alternative to a direct exposure to the funds with an added safety net, he said.

“Those two ETFs have had a slow rally for the last four years,” he said.

The gold miners fund bottomed in January 2016 and the silver one in December 2015.

“They’ve been slowly moving up so there is potential upside to them,” he said.

He noticed the call protection on the first year and said he liked it.

“It’s a good thing to know that you’ll get the annual coupon rate,” he said.

“The note might get called in one year, and at least you get 8.5%, a decent return... obviously not a huge return but one that’s not bad considering the downside protection of 20%.”

Silver lagging

Finally, the use of a buffer at maturity was a plus.

“A buffer is definitely much more favorable than a barrier and makes the overall offer more attractive,” he said.

Worst-of payouts can be problematic when at least one asset drops and falls below the barrier level. But this buysider said such risk is limited with these two underlying funds.

“I would expect both to go up, but the silver one is more likely to go up faster because it’s still on the lower end and has not rallied as much as the gold miners,” he said.

“The miners have rebounded while the silver ETF has been more sluggish. If there is a market decline, the gold miners has more of a downside risk since it has gone up a lot more than the silver fund over the past four years.”

This buysider also examined the yields of both assets, assessing the opportunity cost of not buying the shares. Noteholders are not eligible to receive dividend payments.

“The gold miners have a small dividend of less than 1% while the silver trust pays no dividends at all so you don't give up much by owning the structured note,” he said.

Overall, the risk-adjusted return seemed attractive.

“Both funds should have a positive performance over the next year so you have a pretty good chance of getting called in one year with your 8.5% return,” he said.

Diversification

Tom Balcom, founder of 1650 Wealth Management, said the notes could be used as a diversifier in a portfolio. The two underlying, one a pure commodity and the other closely tied to the price of gold, had returns with a low or negative correlation to the stock market.

“These are two assets that are not moving in tandem with equity. One of the main advantages of this note is that it provides diversification for a client’s portfolio,” said Balcom.

The coefficient of correlation between the Silver Trust fund and the S&P 500 index is 0.22, according to Morningstar. The VanEck Vectors Gold Miners ETF and the S&P 500 index have an even lower coefficient of 0.03.

Dispersion risk

While the low correlation with the rest of the market brings the benefit of diversification, a low correlation between two underliers in a worst-of will generate more risk.

In this case, the underlying funds have a 0.68 coefficient of correlation to one another.

The lower the correlation, the greater the potential to breach the barrier, the prospectus warned.

But Balcom said that the correlation was neither very low nor negative, so the risk was not as high as it appeared.

Moreover, the hard buffer offset some of the dispersion risk.

The buffer and its price

“Having a buffer in place to protect the downside is always nice to have. Here it’s very helpful,” he said.

It was also unusual.

“Buffers are usually associated with leverage. Buffers in autocalls is something you don’t see too often.”

Both underliers are more volatile than broad-based equity indexes. The structure is a worst-of, which implies added risk. Yet, the coupon is only 8.5%. Balcom explained that it was to be expected and seen as a necessary trade-off.

“You’re sort of giving up some of the coupon in order to get the buffer versus the barrier. It makes sense,” he said.

Income-friendly

For some clients primarily seeking income, getting the coupon paid on a monthly basis as opposed to quarterly, was also an advantage, he said.

The same income-oriented clients may appreciate the call protection too.

“Having the one-year non-callable is a great feature. You don’t have to refigure out where to reinvest your money. It reduces the reinvestment risk.”

Balcom typically does not bet on specific sectors or stocks. But this note offered attractive terms, he said.

“It pays a decent coupon. It’s based on two funds that are not correlated with the market. And it has a buffer. It’s a pretty nice deal,” he said.

Second one

Barclays recently issued a nearly identical deal linked to the same pair of ETFs. The bank on Jan. 3 priced $13.46 million of buffered autocallable notes. Coupon barrier, monthly payment and monthly call dates, one-year call protection and buffer amount were the same as this one. The main difference was a shorter tenor of three years and a lower contingent coupon of 6% per annum.

Other difference: the earlier priced notes (Cusip: 06747NXC3) carried a 3.5% fee versus 0.5% for this one.

The upcoming note (Cusip: 06747P2R9) will settle on Friday.

Barclays is the agent for both issues.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.