JPMorgan's knock-out CDs linked to stock indexes could appeal to conservative investors, advisor says

By Kenneth Lim

Boston, June 23 - JPMorgan Chase Bank, NA's recently launched contingent payment certificates of deposit linked to the Russell 2000 and S&P 500 indexes offer investors a chance to potentially outperform the market at a relatively low level of risk, an investment advisor said.

"CDs are actually a relatively easy way for investors who are new to structured products to seek to improve the returns of their portfolios in a very low-risk manner," the advisor said.

JPMorgan links stock indexes

JPMorgan is offering zero-coupon contingent payment dual-directional knock-out CDs due Dec. 31, 2009 linked to the Russell 200 and S&P 500 indexes.

If the indexes remain within the knock-out levels throughout the life of the CDs, the payout at maturity will be par plus a fixed payment of at least $150 per $1,000 CD, or 15% of the principal. If either index closes outside the knock-out levels, the payout will be par.

For each index, the upper and lower knock-out levels will be at least 22.5% above and below the initial index level, respectively. The exact fixed payment and knock-out levels will be set at pricing.

JPMorgan is also offering the same structure on a series of CDs due Feb. 27, 2009.

The eight-month CDs will pay at least $80 per $1,000 CD, or 8%, if the indexes remain within the knock-out levels during the life of the certificates. If either index closes outside the knock-out levels, the payout will be par.

The upper and lower knock-out will be at least 12% above and below the initial index level, respectively, for the eight-month CDs.

Products fit neutral view

The products offer a relatively safe way for investors who are seeking better returns, the advisor said.

"Products that are linked to these common stock indexes are really targeting investors who are looking for a better return than the market," the advisor said. "Structured products usually perform two kinds of functions. One is to provide access to asset classes or strategies or sectors, the other is to provide potentially better returns. In this case these CDs offer 15% for 18 months or 8% for eight months, which is a good deal if you think the index isn't going up by more than 15% or 8%."

Investors in the product will likely have a neutral view of the U.S. equity markets, the advisor said.

"Obviously you don't want the indexes to fall by more the knock-out levels or to go higher," the advisor said. "Basically you need to have a neutral view. Now, think about it. If you don't think the market is going anywhere, chances are you're wondering how to make a better return. So a product like this that can get you 15% in 18 months even if the market is flat now looks very interesting."

CDs address risk concerns

The CD structure should appeal to investors who are conservative, the advisor said.

"The main difference between a CD and a structured note issued by the bank itself is that one is FDIC insured, so you're more confident of getting your money back," the advisor said. "The flip side of this is that you should expect to get less out of a CD than a note."

"There are definitely a lot of investors out there who aren't comfortable with holding bank-issued paper," the advisor added. "A lot of these are retail investors who want to improve their returns, especially in a market like this, but aren't completely comfortable yet with the idea of a structured product. If it's a CD, at least you can feel confident that your principal is really secured."

Jittery investors are becoming commonplace, the advisor said.

"You bet," the advisor said. "When people read about Bear Stearns and Lehman Brothers and Morgan Stanley, they start to think that, hey, how solid are all these banks, really? If I tell a client about a structured product, even if they don't ask me about it, now I make sure I tell them about this risk."

Product could underperform

Despite the relative security of the CDs, investors must understand that they will be giving up potential returns for that safety, the advisor said.

"If this was a note, the payout would probably be some basis points higher," the advisor said.

If the indexes perform better than 15% for the eighteen-month CD and 8% for the eight-month product, investors will be doing worse than the underlying indexes, the advisor said.

Investors should also understand that it only takes one of the indexes to trigger that knock-out.

"There's definitely increased risk here because it takes both to get you your payout, but only one to erase it," the advisor said.

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