Citi’s $17.79 million dual directional notes on Gold Miners ETF for neutral, moderate bulls

By Emma Trincal

New York, March 22 – Citigroup Global Markets Holdings Inc.’s $17.79 million of 0% dual directional trigger Performance Leveraged Upside Securities due April 20, 2023 linked to the VanEck Vectors Gold Miners ETF are designed for investors expecting gold mining stocks to trade within a range, advisers said. Any spike in volatility would compromise the performance both on the upside and on the downside, they noted.

If the fund finishes above its initial level, the payout at maturity will be par of $10 plus 200% of the gain, up to a maximum return of 23%, according to a 424B2 filing with the Securities and Exchange Commission.

If the fund falls by up to 20%, the payout will be par plus the absolute value of the return.

Otherwise, investors will be fully exposed to any losses.

Downside scenario

Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, said the structure was favorable to a certain group of investors.

“The cap is reasonable. Last time we were 23% above the current price was at the end of 2012,” he said.

“And yet, I still think there is more upside to be had. I think the upside is probably greater than 23%.”

The barrier may be useful but may not be justified for bulls.

“The protection is nice. I’m not too concerned about it because I think gold is in a bull market,” he said.

“The only concern about the downside protection would be if we have a sharp recession with a sharp sell-off.

“Anytime you have a sell-off, it has an impact on all stocks, and gold miners would not be spared.”

Bullish perspective

However, the structure of the notes did not match this adviser’s view on the underlying fund.

“I’d rather buy the ETF outright,” he said.

Sure, it’s nice if you get +10% when the ETF is down 10%. But that’s not really what my expectations are.

“The terms are attractive if you’re neutral or negative on the gold miners.

“But I’m not neutral and I’m not negative.”

Being bullish, Chisholm would opt for a long position on the underlying. But if he had to use a structured note that would more closely reflect his view, he would eliminate the cap and the leverage.

“I don’t think you need the leverage. For the downside, I would probably want a buffer. I would limit my downside risk and get unlimited upside,” he said.

Range bound

Jonathan Tiemann, president of Tiemann Investment Advisors, said he did not have a “strong” opinion on the underlying gold miners ETF. For this reason, but also because of the way the payout was structured, he did not have a strong view on the note either.

“I’m trying to wrap my arms around it, and it looks a little complex for its own sake,” he said.

“You’re basically selling the upside to outperform in the mid-range.

“Under the terrible scenario, if you breach the barrier, you just market perform. You’ll lose anywhere between 20% and 100%.

“What you want is being in between that -20% and +23% range.”

Absolutely not essential

This adviser said he did not find the absolute return component very useful.

“It seems a little bit gimmicky to me. You’re long on the upside and you’re short if it’s down. But you don’t want it to be down too much to the point of breaching the barrier. Yet, you’re better off if it’s down 18% rather than down 2%.

“You need to be within that range but the further you are the better off,” he said.

Tiemann said investors had to have an odd view on the volatility of the underlying.

“Interesting play on volatility. You want the volatility but not outside of that range,” he said.

Clients’ returns near the barrier level could yield drastically different outcomes depending on which side of the barrier the final price would fall into.

“A couple of days before the maturity, your client could be excited to see they’re making 20% if the price is down 20%. But all of a sudden, if it drops 20.01%, they’re now down 20.01%. That’s a one-eighty. How do you deal with that? It would be a strange thing to cope with even if you have explained the terms in detail.

“I’m not too excited about the absolute value, really,” he said.

Barrier, cap

The barrier was “just average,” he added.

“20% doesn’t seem too bad. But there’s no reason to be astonished if it breaches 13 months from now,” he said.

The underlying fund was volatile, and the structure did not eliminate risk on the upside.

“23% doesn’t feel like a very high cap,” he said.

The ETF showed a 52-week low on Sept. 29 at 28.83. It reached its high two weeks ago at 40.26, a nearly 40% jump in five months.

ETF preferred

“I’m not really sure what the note is for and what it’s supposed to do,” he said.

“People want the leverage, I guess.

“But why would you want the leverage in such a narrow range?”

The price patterns of gold and gold miners was not an incentive to play this asset class within a defined timeframe, he added.

“Even if it’s only 13 months, you’re sort of stuck with it during that time.

“Gold tends to sit for a while before making big moves.

“If I was interested in the sector, I’d buy the ETF rather than trying to juice it.

“At least I would have control over the timing,” he said.

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the agent with Morgan Stanley Wealth Management as the dealer.

The notes settled on Monday.

The Cusip number is 17330L447.

The fee is 2.25%.

© 2015 Prospect News.
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