JPMorgan’s $435,000 capped barrier notes on iShares Brazil ETF provide different tradeoff

By Emma Trincal

New York, June 8 – JPMorgan Chase Financial Co. LLC’s $435,000 of 0% capped barrier notes due July 8, 2022, linked to the iShares MSCI Brazil ETF limit without enhancing the upside. But the tradeoff consists of capping the upside for a barrier, sources said, adding that the cap level was competitive.

If the ETF finishes above its initial value, the payout at maturity will be par plus the gain, with the payout up to a maximum return of 21.45%, according to a 424B2 filing with the Securities and Exchange Commission.

If the ETF finishes flat or declines by up to 30%, the payout will be par. Otherwise, investors will be fully exposed to any decline.

Big miner

Tom Balcom, founder of 1650 Wealth Management, said the notes are a more defensive alternative to a direct investment in the fund.

“Since October, this stock has skyrocketed. It was a $26 a share and is now trading at around $42. It had a huge recovery,” he said.

“One stock seems to be driving a lot of the performance. It probably did very well with the commodity rally.”

He was referring to iron-mining company Cia Vale do Rio Doce, the top holding of the fund with an 18.23% weighting.

The nearly 20% weighting may raise concerns about excessive concentration for some investors, he said.

Barrier versus leverage

For Balcom, the main question was to determine whether the note provides value compared to a direct investment in the ETF.

“I’m always asking myself the same question: why would I be buying the notes and not the ETF? In this case it’s not for the leverage. So why would I cap my gains? Obviously, investors buy the note for the downside protection,” he said.

“A 21% cap in one year is a pretty healthy cap. I don’t imagine clients being too upset about it.

“So, you may not have any leverage, but the cap is quite high, and you have a 70% barrier.”

“If you’re more bullish, if you think you can get more than 21%, then you should buy the ETF.

“This note gives you exposure to this specific country but with a hedge.

“You’re looking at a market that had a nice run up. You want the exposure. You think there is room for more upside. But you want to limit your risk.

“I’m always nervous with notes that don’t provide a hedge. Early last year, no one could forecast a pandemic like the one we had. You never know what can happen in the market, especially when you’re betting on a single country.

“I’d rather have one dollar in my pocket than 80 cents.

“This is just a more defensive play on Brazil.”

Last spring

Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments, said the share price of the iShares MSCI Brazil fund used to be more depressed and therefore more valuable. But without being a bargain, the ETF remains less overvalued than many other asset classes and markets, he noted.

“The fund bottomed in March of last year and began to recover in May. I bought my nine favorite stocks from this ETF around April and May. I picked stocks with low P/E of 6 or 7 and best long-term growth potential. By June, I sold them with a 44% gain. I don’t intend to be a short-term trader, but it was just going up too fast,” he said.

Inflation driven

“With Brazil, you can have an unexpected sell-off due to a political scandal. They have quite a few political scandals so that’s where your downside risk is.

“The fund has gone up a lot since the end of October, partly because Brazil is an inflation-sensitive market.”

The Brazilian economy is overwhelmingly based on exports, he noted. Brazil, a leading exporter of oil and raw materials, tends to rally with inflation and commodities, he added.

“The ETF has become a little bit trendier than I would like to see when I’m buying a security. But for another year, inflation should continue to have a positive impact on the price.

“The downside risk is not a worldwide recession, which could happen but not within a year, I don’t think. The real downside risk is some unexpected turmoil and change in political leadership,” he said.

Terms

Kaplan said the terms were “not necessarily compelling” but “fair.”

“The 70% barrier is reasonable. I wouldn’t say generous but it’s reasonable,” he said.

“And at least the 21.45% cap is relatively high.

“I also like the one-year timeframe.”

The entry point was within an acceptable range in his view.

“It would have been much better to get this deal back in September or October when prices were pretty depressed,” he said.

“The ETF right now is not overpriced, but it was trading at much better levels not so long ago.

“At least, it remains more reasonably priced than most markets in the world.

“For a one-year timeframe, I think it’s not a bad deal,” he said.

The notes are guaranteed by JPMorgan Chase & Co.

The agent is J.P. Morgan Securities LLC.

The notes will settle on Wednesday.

The Cusip number is 48132UKE2.

The fee is 1%.

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