BMO’s autocallable notes tied to oil, gold ETFs offer extra cushion with low entry prices

By Emma Trincal

New York, Dec. 21 – Bank of Montreal’s autocallable cash-settled notes with conditional interest payments due Dec. 30, 2022 linked to the lesser performing of the SPDR S&P Oil & Gas Exploration & Production exchange-traded fund and the VanEck Vectors Gold Miners exchange-traded fund give investors additional safety and chances of getting paid due to a deep barrier and depressed prices, a contrarian portfolio manager said.

Interest will be payable quarterly at a rate of 10.4% per year if each ETF closes above its coupon barrier, 65% of its initial level, on the observation date for that quarter, according to an FWP filing with the Securities and Exchange Commission.

The notes will be called at par plus the coupon if each ETF closes above its initial level on any quarterly call date beginning on Sept. 23, 2019.

The payout at maturity will be par unless either ETF finishes below the 65% trigger level, in which case investors will lose 1% for each 1% decline of the worse performing ETF from its initial level.

Deep value

“On both funds, you’re getting in at attractive discounts,” said Steven Jon Kaplan, founder and portfolio manager of TrueContrarian Investments.

The VanEck Vectors Gold Miners ETF is listed on the Nasdaq under the symbol “GDX.”

The equity fund replicates the performance of the Amex Gold Miners index. It was trading at $20.50 a share on Friday’s midday session.

“GDX was at a bottom in September. Since then it has gone up but not by a huge amount,” he noted.

“You are still very close to the fund’s lowest price in two-and-a half years. If you look back further, we’re down even more. We’re 68% off the all-time high of September 2011 of $63.47.

“You’re buying at a compelling bargain.”

Kaplan also found value in the SPDR S&P Oil & Gas Exploration & Production ETF. Listed on the Nasdaq under the ticker “XOP,” the ETF was trading at $25.50 a share at midday on Friday.

“XOP is a little bit more large-cap weighted. It’s not as volatile as the other one. Yet it has dropped dramatically as well,” he said.

The share price is 67% off its June 2014 high of $78.00.

“In both cases you’re getting fairly compelling entry levels. This is why I like this trade.”

Commodities bull

Kaplan is bullish both on oil and gold miners as he anticipates commodities prices to rebound in 2019.

His bet is based on a relative bearish view on the dollar.

“There is a long-standing inverse correlation between the dollar and commodities simply because the dollar is the global trade currency. If it strengthens, other countries have less purchasing power to buy raw materials,” he said.

Commodities did poorly this year in large part because of the stronger dollar, he explained, adding that this is about to change.

“The dollar is already showing some weakness. I don’t expect the bull trend to persist onto 2019.”

Most of the demand will come from emerging markets, he said.

“Emerging market countries perceive gold as a safe heaven. Government in some of those countries, like India, have banned the use of high-denomination bills. Local currencies are vulnerable to all sorts of fluctuations and it has made gold very popular as a hedge,” he said.

Oil demand will also increase from emerging markets, especially from India and China.

“Those countries are going through an industrialization phase. They have a huge increase in demand for cars,” he said.

Not speculative

Kaplan, a contrarian investor, would tend to buy securities at deep discounts and keep the position long until he finds a good exit price, which could take months or longer. Seeking growth, he would generally shy away from capped gains. But not everyone has the same investment goals.

“The point of owning these notes is not to take advantage of the rebound. This is not a speculative bet. Instead, you’re monetizing the volatility and you’re taking advantage of the fact that the assets are undervalued so you can get this steady stream of income.

“Being capped at 10.4% a year would concern me if I was to buy the notes for growth. But if you want growth, you’re buying the indices themselves.”

The four-year maturity was a positive, in his view.

“I expect a lot of turmoil in 2020 with a potential recession and the Presidential Elections. Needless to say, I wouldn’t buy a two-year note. But owning a one-year, a four-year or even a five-year is good,” he said.

He would tend to like the one-year maturity best, which the product could match.

“This note may end up being some sort of a one-year if it gets called in nine months, which is likely.

“You’re buying off from a low. You have a very high percentage chance of being called away.

The result – getting a 7.8% return is nine months – would be a positive outcome, he said.

“If you’re using this note for income and not growth, the 65% barrier on an already low price works in your favor,” he said.

BMO Capital Markets Corp. is the agent.

The notes (Cusip: 06367WFM0) will settle on Dec. 27.

© 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.