Contrarian picks RBC’s notes on VanEck Gold Miners versus BofA’s digitals on Silver ETF

By Emma Trincal

New York, Oct. 7 – A contrarian and value portfolio manager compared two short-term notes linked to precious metals-related funds. Despite one product showing greater probabilities of paying out, he picked the notes with the most undervalued underlying and the highest potential return.

BofA Finance LLC priced $2.69 million of 0% market-linked one look notes due Oct. 13, 2023 linked to the iShares Silver trust, according to a 424B2 filing with the Securities and Exchange Commission.

The ETF is listed on the NYSE Arca under the ticker “SLV.”

If the ETF finishes flat or gains, the payout at maturity will be par plus 27.7%. Otherwise, investors will be fully exposed to any ETF decline.

Royal Bank of Canada priced $3.92 million of 0% Accelerated Return Notes due Nov. 24, 2023 linked to the VanEck Gold Miners ETF, according to a 424B2 filing with the SEC.

The ETF trades on the NYSE Arca under the ticker “GDX.”

The payout at maturity will be par of $10 plus triple any ETF gain, capped at par plus 43.35%. Investors will be exposed to any ETF decline.

Beyond mathematics

“The GDX deal is probably the better choice because GDX is more depressed than SLV. Gold miners will be higher since they’re very undervalued relative to gold prices,” said Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments.

“From the structure standpoint, one big advantage of the GDX note is that you get 3-to1 and the cap is much higher. Even though it’s a 14-month, the cap remains higher if you annualize it.”

At first glance however the odds of getting paid are greater with the iShares Silver trust, he noted.

“Mathematically, there is no question that the SLV is more likely to pay out since the fund doesn’t have to go up by any stretch. You’ll get your 27.7% even if it’s flat. With the GDX, you still need a certain price increase to hit the cap,” he said.

But this reasoning applies only to a comparison between random assets, he said.

“GDX is much more favorable than SLV. Therefore, the chance of getting the cap with GDX is also very high. And it’s a much higher cap.”

Both depressed

Kaplan compared the initial prices of each underlier with their respective all-time highs of over a decade ago.

From its $61.62 all-time high in September 2011 to its level at pricing of $23.69, the VanEck Gold Miners ETF fell by 61.5%.

The Silver trust ETF in comparison dropped 64% from a $48.35 all-time high in April 2011 to its initial price of $17.37 on the trade date.

“They both dropped a lot, but SLV dropped more because it was in a huge bubble in 2011,” he said.

To illustrate the extent of this “bubble, he said that the iShares Silver trust skyrocketed from $8.45 on October 28, 2008 to $48.35 on April 28, 2011, a jump of over 472%. Even in less than a month before the April peak, the price rose more than a third.

“GDX was on the high side too, but it was not in a bubble. It didn’t’ have this massive percentage increase,” he said.

Past bear markets

The other reason leading Kaplan to bet on a price increase in gold miners was based on the observation of historical trends, on which he built his conviction.

“Yes, you need GDX to be up to hit the cap, while you don’t with SLV. But the triple leverage will quickly bump your return to the cap,” he said.

Kaplan described the behavior of the gold miners sector during bear markets.

“Gold miners consistently rallied when growth stock bubbles burst in the past. The pattern was visible after the 1929 crash, the 1972-73 Nifty Fifty bear market, the 2000 internet bubble and more recently the coronavirus bubble of 2020,” he said.

“It usually doesn’t happen right away but typically six to 12 months after the bubble burst. Then the sector begins a robust and durable rally. You’re looking at minimum returns of 1,000%, or even 1,500% to 1,600% in just a few years.

Tradeoff

Both notes are equal when compared to the downside payout as none offer any type of protection.

“Normally the tradeoff when you cap the upside is to get some form of protection. Presumably, that’s the reason people buy structured notes,” he said.

In these two deals, the tradeoff for giving up some of the upside is either the digital boost or the 3x leverage, he said.

“That’s why you need to compare the caps in each deal,” he said.

“I tend to prefer the one with the greater return, which is GDX.”

“Even if mathematically SLV is a superior choice, I would go with GDX because I can achieve much better return and the odds are still high.

“I would take a chance with the best horse.”

BofA’s notes on the iShares Silver trust are guaranteed by Bank of America Corp.

BofA Securities, Inc. is the underwriter.

The Cusip number is 06054B735 and the fee is 1.5%.

Royal Bank of Canada’s leveraged notes on the VanEck Gold Miners ETF were distributed by BofA Securities.

The Cusip number is 78015B369 and the fee is 1.75%.

Both offerings settled on Thursday.

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