JPMorgan’s notes tied to J.P. Morgan Balanced Value Dividends 5 introduce new underlying index

By Emma Trincal

New York, March 26 – JPMorgan Chase Financial Co. LLC’s 0% notes due Dec. 31, 2024 linked to the J.P. Morgan Balanced Value Dividends 5 index offer first-time exposure to JPMorgan’s proprietary index established in January, according to data compiled by Prospect News.

The payout at maturity will be par plus at least 105% of the index return, according to a 424B2 filing with the Securities and Exchange Commission.

If the index declines, investors will lose 1% for every 1% that the final value is less than the initial value, provided that the payment at maturity will not be less than $950 per $1,000 note.

The J.P. Morgan Balanced Value Dividends 5 index was established on Jan. 27 by J.P. Morgan Securities LLC.

The index dropped 4.85% over the past year and a shed 9.91% year to date, according to back-testing data.

Since inception, the index shed 10.25%, or half of the S&P 500 index losses during the same period.

Short history

“I’m not familiar with this index. There isn’t a lot of history,” said Matt Medeiros, president and chief executive officer at the Institute for Wealth Management, for whom this data gap would represent a serious drawback.

“Without a solid track record, it’s hard to position it from an asset allocation perspective.”

Balanced portfolio

The rules-based index dynamically allocates between an equity component through the First Trust Value Line Dividend index fund and a bond component via the J.P. Morgan Total Return index, according to the prospectus.

The Value Line Dividend index targets stocks showing above-average dividend yields.

The bond constituent dynamically allocates across up to 12 bond ETFs.

The index targets a level volatility of 5%.

Conservative investment

The combination of principal-protection with the exposure to a low-volatility index is welcome in today’s market, said Medeiros.

“When you get into liquidation cycles like what we have now, some assets that used to have low correlations suddenly see their correlation spike over a short period of time,” he said.

“The length of the note and its defensive structure give investors an incentive to stay the course.

“In this current environment, it’s very important for advisers to have conversations with their clients about staying invested.

“This kind of note can help you achieve that goal.”

95% principal-protection

Steve Doucette, financial adviser at Proctor Financial, said he would consider the note as a bond replacement.

“As I’m looking at my fixed-income allocation, I see the need to rebalance. Floating-rate bond funds have outperformed. Do we want to stay in that through the next downturn?” he said.

He liked the 95% principal-protection given the equity component of the underlying.

“It gives you a nice peace of mind,” he said.

“If the stocks in the index go up, you have the potential to outperform,” he said about the uncapped, slightly leveraged upside.

Doucette pointed to the interest rate risk attached to bond portfolios as rates have moved in different directions in reaction to the coronavirus crisis and its impact on the economy as well as the new stimulus package.

Yield alternative

“I think what this JPMorgan index is trying to do is give you some form of yield through equity, which isn’t a bad idea since a rise in interest rates can really hurt your traditional fixed-income portfolio,” he said.

“The note captures some of the yield through the dividends.

“You can use it as an asset allocation tool to restructure some of your bond exposure.

“With the equity component you might get a huge bounce and you’re not taking any equity downside risk beyond 5%.

“I kind of like it.”

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes are expected to settle on Tuesday.

The Cusip number is 48132KAF2.

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