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Bank of Montreal’s buffered notes linked to metals basket offer defensive play in metals

By Emma Trincal

New York, Jan. 10 – Bank of Montreal’s 0% buffered notes due Jan. 29th, 2016 linked to a basket of metals target skittish commodities investors seeking some downside protection at the cost of a possibly decreased return on the view that the metals rally may be bound for a correction, sources said.

The notes may be appropriate for conservative or institutional investors who want to reduce the volatility of their metals holdings while still participating in a longterm rally, a commodities analyst argued.

The equally weighted basket includes copper, lead, nickel and zinc, according to a 424B5 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus any gain in the basket, up to a maximum return that is expected to be 125% to 150%. The exact cap will be set at pricing.

Investors will receive par if the basket falls by 20% or less and will be exposed to any decline beyond 20%.

“This is for someone who wants to remain positioned in metals but doesn’t want to take the downside risk,” said Keith Springer, financial adviser at Springer Financial Advisors.

“They’re getting 20% downside protection” but are subject to the cap. “They’re not getting the bang for the buck, but they still want to play it,” he said.

Springer noted that the notes would only be attractive to conservative investorswith a moderately bullish outlook on commodities.

“They’re going to miss out on the big ride – 125% to 150% over five years is not that much in commodities. It sounds like alot, but it’s not.”