Citi’s $2 million Phoenix autocall on gold miners, silver ETFs offer rare buffer

By Emma Trincal

New York, May 6 – Citigroup Global Markets Holdings Inc.’s $2 million of autocallable contingent coupon equity-linked securities due May 6, 2027 linked to the worst performing of the iShares Silver Trust and the VanEck Vectors Junior Gold Miners ETF provide in addition to a double-digit coupon rate a buffer for the downside protection instead of the conventional barrier.

The notes will pay a contingent monthly coupon at an annual rate of 10.75% if each ETF closes at or above the coupon barrier level, 80% of the initial level, on the valuation date for that period, according to a 424B2 filing with the Securities and Exchange Commission.

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

If the notes have not been called and each ETF finishes at or above its 80% final barrier, the payout at maturity will be par plus the final coupon.

Otherwise, investors will lose 1% for every 1% that the worst performing ETF declines beyond the buffer.

Entry point

Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments, said the two underliers constituted a sound choice.

“The timing is pretty good. These ETFs are relatively undervalued, so this is coming at a good time,” he said.

“Gold has been in a long-term bull market since 2000. But it also experienced big pullbacks, so it’s not overstretched. Although the bullish trend was strong, those repeated pullbacks prevented gold and silver from being overvalued.

“GDXJ for instance peaked in August 2020 at around $66 a share. In less than a year and a half later, the price plummeted to $36, a 30-points drop,” he said.

The VanEck Vectors Junior Gold Miners ETF is listed on the NYSE Arca under the ticker “GDXJ.”

“SLV has gone through a mania after the March 2020 pullback. But it was brief. Prices are no longer dictated by the crowd, and you don’t have extreme valuations anymore,” he said.

The iShares Silver Trust is listed on the NYSE Arca under the ticker “SLV.”

Adding stability

Meanwhile, the stock market has been hit hard over the past several weeks as the Federal Reserve is pulling liquidity from the financial system while interest rates and inflation are soaring. For Kaplan, the U.S. is already in a bear market.

“The bubble in growth stocks is bursting. That’s usually a very good time for precious metals. If you go back to 1929, 1972 and 1999 when the most popular growth names crashed, silver and gold did very well after that,” he said.

Amazon.com Inc. is down 31.5% year to date and has dropped 40% from its July high.

Meta Platforms Inc. shed 39% this year and lost 47% from its September peak.

“Right now, big tech stocks still have extreme valuations, their P/Es are still unjustifiably high, but the bubble has started to burst for the most popular, overcrowded growth names,” he said.

Call, buffer

Given his relatively bullish view on precious metals, Kaplan said he liked the notes.

“It’s definitely possible that you may get called after one year. But at least you get a decent return,” he said.

“If you don’t like this outcome, if you hold a very bullish view, nothing stops you from buying the ETFs directly.

“But for a more conservative outlook this setup allows you get a decent gain.”

Even if one is upbeat about the underliers, having a buffer is always a good idea, he noted.

“The 20% buffer is very good. I like the idea of having this type of protection as opposed to a barrier. Even over the course of five years you can always use that type of protection. You never know. In five years, a lot of unpredictable things may happen.

“In general, more notes should have a buffer,” he said.

Monetizing volatility

Jerry Verseput, president of Veripax Wealth Management, said he would rather have a deeper level of protection even if it’s not offered as a buffer.

“There’s only one thing I don’t care about in this note: who knows what SLV and GDXJ are going to be in five years?” he said.

“Both, particularly GDXJ, can be really volatile at times. With the present volatility we have in the market, I think there are easier ways to get 10% per year.”

Verseput said the equity sell-off in the U.S. market offers the opportunity to strike deeper barriers.

“Some indices like the Nasdaq are already in bear market territory,” he said.

The Nasdaq is 25% off its high of November. The Russell 2000 has plunged more than 36% from its high in January.

Conventional indices

“You can easily get a 10% coupon with a 60% barrier right now. A worst-of on the Nasdaq and Russell should get you that kind of return with a 40% contingent protection,” he said.

“Since the market has already dropped a lot, it’s a lot safer in my view to strike a note on those broadly diversified indices rather than trying to guess what GDXJ and SLV are going to be in five years.”

Verseput said that the current pullback may be temporary.

“Interest rates are still low. Yields remain below inflation.

“All this money on the sidelines is going to have to go back to work at some point. You’re not going to see a sustained bear market,” he said.

“I would go for those more conventional underlying indices. You can get the same 10% coupon and it’s probably a lot less risky.”

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter.

The notes settled on Thursday.

The Cusip number is 17330FLF6.

The fee is 4.5%.

© 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.