BMO’s $2.36 million autocalls on junior gold ETF show deep barrier for defensive gold play

By Emma Trincal

New York, Jan. 22 – Bank of Montreal’s $2.36 million of autocallable barrier notes with contingent coupons due Oct. 20, 2025 linked to the VanEck Junior Gold Miners ETF may not offer the highest coupon for a gold-related underlying. But the structure provides a defensive barrier, which may appeal to more conservative investors, an adviser said.

The notes will pay a monthly coupon equal to 10.15% per year if the ETF’s closing level is at least 60% of its initial level on the corresponding observation date, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be automatically redeemed at par plus the contingent coupon if the ETF closes above its initial level on any monthly observation date after six months.

If the notes are not called, the payout at maturity will be par unless the fund closes below 60% of its initial price, in which case investors will lose 1% for each 1% decline of the fund from its initial price.

Portfolio diversification

“The 40% barrier is pretty nice. But GDXJ this is a volatile fund,” said Ken Nuttall, chief investment officer at BlackDiamond Wealth Management.

“GDXJ” is the ticker symbol for the underlying ETF, which tracks the MVIS Global Junior Gold Miners index, a benchmark for small-capitalization companies involved primarily in the mining for gold and/or silver.

The implied volatility of the ETF is 36%.

“As a diversifier from your top equity benchmarks – S&P, Russell etc. – it makes some sense,” he said.

“But I think you can see much higher coupons out there.”

Worst-of with miners

Nuttall mentioned notes which provide some partial exposure to gold miners.

Earlier this month for instance his firm purchased Citigroup Global Markets Holdings Inc.’s three-year callable notes linked to the worst of the SPDR S&P Biotech ETF, Technology Select Sector SPDR Fund and the VanEck Vectors Gold Miners ETF. The VanEck Gold Miners ETF is similar to GDXJ but tracks much larger market-capitalization companies. As a result, its 27.5% implied volatility is lower than that of its junior counterpart.

Each month, the notes pay a 15.7% annualized contingent coupon based on a 70% coupon barrier. The monthly issuer call kicks in after three months. The principal repayment barrier at maturity is 50%.

“There is obviously some risk with the worst-of, but you also get compensated for it with a 15.7% coupon. The risk is greatly reduced with the 50% barrier, which for us was really the main thing,” said Nuttall.

For this adviser, the issuer call did not constitute a risk as notes may or may not get called when the issuer has the discretion to exercise the option.

He compared those notes with the BMO structure.

“You just have pros and cons on both sides. But personally, I like to see a higher yield than 10%.

“I think I would feel more comfortable if the underlier was GDX instead of GDXJ,” he said.

The single asset exposure represents the expression of a market opinion, he added.

“You buy this note if you’re bullish on gold. While GDX and GDXJ are equity funds, they’re highly correlated to gold prices,” he said.

“You really have to have a view. Some people buy gold because they hate the stock market, they’re the gold bugs. Others buy it to hedge against inflation or against a recession. We use gold as a diversifier.”

Two-week roll

Nuttall mentioned another deal referencing GDX in a worst-of.

“This is a note that [Advisors Asset Management, Inc.] does every couple of weeks with different issuers. They take the best terms. They keep rolling it every two weeks for the same RIA,” he said.

He declined to name it.

A recent example was UBS AG, London Branch’s 15-month notes, which priced earlier this month.

Investors are exposed to the least performing of the S&P 500 index, the Russell 2000 index and the VanEck Gold Miners ETF. The monthly contingent coupon with memory is 16% per annum based on a daily observation coupon barrier of 80%. The notes are automatically callable quarterly after six months. The point-to-point barrier at maturity is 65%.

In this case, the coupon risk was substantially elevated with the “American” (daily observation) barrier of 80%, he said.

“The 16% coupon is quite high. That’s how they compensate you for the riskier American barrier,” he said.

Solid barrier

Andrew Valentine Pool, main trader at Regatta Research & Money Management, said the structure of the BMO note was relatively conservative.

“I think 60% is a pretty good barrier,” he said.

The initial underlying price on the trade date was $36.36 setting the 60% barrier at $21.82.

The ETF closed on Monday at $33.61, or 50% below its five-year high of August 2020.

“The ETF hit the $21.82 barrier only once in the last five years and that was in March 2020 during the onset of Covid, which was a major event,” he said.

“You have a 10% coupon. You’re likely to receive your 10% coupon.

“And with the six-month no-call, you know that you’re pretty sure to get at least half of that, which is good.

“So, while the ETF is somewhat volatile, the barrier is significant. 40%, that’s a pretty big fall from $36.36.”

Pool said he has had exposure to both GDX and GDXJ.

“We’ve traded them before. But we don’t hold them. As structured notes, we would hold it. But our preference has been to swing trade them because of the volatility.”

BMO Capital Markets Corp. is the selling agent.

The notes settled on Thursday.

The Cusip number is 06375MQW8.

The fee is 1.05%.

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