BofA’s $1.51 million buffered autocalls on gold, silver ETFs seen as defensive play on inflation

By Emma Trincal

New York, Feb. 3 – BofA Finance LLC’s $1.51 million of contingent income buffered autocallable yield notes due Jan. 30, 2025 linked to the iShares Silver Trust and the VanEck Vectors Gold Miners ETF may appeal to investors looking to monetize inflation risk for income, advisers said.

The notes will pay a monthly coupon at an annual rate of 8.5% if each ETF closes above its 80% coupon barrier on a related determination date, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par plus the coupon if each ETF closes at or above its initial level on any quarterly determination date after one year.

If the final share price of each ETF is greater than or equal to the 85% downside threshold level, the payout at maturity will be par plus the final contingent coupon. Otherwise, investors will lose 1% for every 1% decline in worst performing ETF beyond 15%.

Inflation-fighting assets

Steve Doucette, financial adviser at Proctor Financial, weighed the benefit of a buffered structure versus the upside potential in the current economic environment.

“It’s an interesting note. Nice to see a worst-of that’s not an autocall on three tech stocks,” he said.

“Problem is when you get to commodities, it’s a whole different game.

“The 8% return is not much if we start to see the gold bugs piling into gold again.”

While the VanEck Vectors Gold Miners ETF is an equity fund tracking the performance of gold mining companies, its returns are highly correlated to the precious metal.

The iShares Silver Trust on the other hand is a commodity ETF. It replicates the price of silver bullion.

“Both ETFs could rally much more than 8%. As the inflation persists, gold and silver are considered good hedges. Should you hold a note when you could get a much higher return being long the underlying funds?” he asked.

“Do you want to trade your inflation hedge for just 8%? Inflation is probably going to be here for a while. So, you may want to ask yourself if it’s a good tradeoff.”

Narrow bet

The 8% coupon on two volatile funds reflected the defensive structure offered by the 15% hard protection, he noted.

“The buffer is a good thing but you’re going to take a lot of risk with a commodity play. And it’s not just commodities. It’s bet on precious metals. That’s a bit narrow,” he said.

Doucette said he would probably change the underlying if he wanted to buy a note offering commodities exposure. And one way to limit the downside risk would be to broaden the exposure.

“Instead of using gold and silver, we would go for a broad commodity index,” he said.

Terms

One positive aspect of the structure was the one-year call protection, he said.

“Unless one of those two drops below 80%, you collect your 8% on the first year. If inflation persists, you’re likely to be called after that but at least you keep your full return,” he said.

“Worst case scenario, there is no inflation...the 15% buffer seems like a pretty strong protection level.”

Doucette said the notes may have to be readjusted toward a more aggressive bias.

“I always like to outperform both ways. I’m outperforming on the downside. But the coupon is not terribly exciting,” he said.

Doucette said he did not have a specific view on the underlying funds over three years.

“You never know what to expect. And I would have to do my due diligence.

“But if inflation is going to persist, you’re unlikely to go down a lot.

“So, I might look at cutting the buffer a little, maybe to 10% to beef up the coupon,” he said.

Risk mitigating factors

A financial adviser said he liked the defensive aspect of the structure.

“The 8% coupon is not huge, but it’s still nice. It’s also a function of the risk you’re taking,” he said.

“Those are volatile ETFs but you’re getting a great 15% buffer.

“Also, you’re not buying those funds at their highs.”

When the notes priced on Jan. 26, the iShares Silver Trust closed at $21.72 and the VanEck Vectors Gold Miners ETF, at $30.63.

At those levels, the silver ETF was 18% off its June high and the gold miners fund nearly 24% below its May peak.

“You’re getting a nice cushion in there. Those funds are already down a lot, and you have the buffer on top of that,” he said.

Finally, inflation could be viewed as an additional layer of safety.

“Gold and silver are inflation hedges. With inflation, they’re supposed to go up, not down. Although we can’t predict the future, the fact that we have rising inflation should work to your benefit,” he said.

Bond replacement

“Obviously if you expect inflation to be much worse you may be bullish on the ETFs. In that case, the 8% return is not compelling. You’re better off being long the ETFs,” he said.

This adviser would consider the notes as a pure income play.

Asked whether he would consider reducing the buffer size to boost the yield due to the margin of safety offered by the discounted entry prices and the positive impact of inflation, his answer was negative.

“I wouldn’t touch the buffer. The buffer is for the uncertainty. It’s for things you can’t foresee. I think it’s what makes this note very appealing,” he said.

If he decided to buy it, he would allocate it to his fixed-income portfolio.

“You could put it in a number of places. It could be in equities since the gold miners are stocks. I would probably use it as fixed-income replacement, preferably under the high-yield bucket of that allocation,” he said.

The notes are guaranteed by Bank of America Corp.

BofA Securities, Inc. is the selling agent.

The notes settled on Monday.

The Cusip number is 09709UYF9.

The fee is 3%.

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