JPMorgan’s $4.17 million leveraged notes on U.S. assets offer uncapped return over five years

By Emma Trincal

New York, Dec. 14 – JPMorgan Chase Financial Co. LLC’s $4.17 million of 0% uncapped accelerated barrier notes due Dec. 14, 2026 linked to the least performing of the Dow Jones industrial average, the Nasdaq-100 index and the iShares Russell 2000 Value ETF provide and attractive upside payout for investors who remain bullish despite the high valuations observed in the U.S. equity markets.

If each asset finishes at or above its initial level, the payout at maturity will be par plus two times the return of the worst performing asset, according to a 424B2 filing with the Securities and Exchange Commission.

If any asset falls but each asset finishes at or above the 70% barrier level, the payout will be par.

Otherwise, investors will be fully exposed to the decline of the worst performing asset.

Balanced structure

The notes gave investors with a positive outlook a high level of confidence to be able to beat the market, said Tom Balcom, founder 1650 Wealth Management.

“In five years, those three indexes should see some positive performance. Getting two times the return especially with no cap should counteract the underperformance,” he said.

“Even if the worst one is up only 20% in five years, you’re getting 40%.”

Balcom said he also liked the downside protection.

Barrier is a keeper

“The probability of breaching a 30% barrier in five years is probably low. And yet, I’m always in favor of a barrier. Better have some downside protection than nothing,” he said.

Some bullish investors do not believe a protection is warranted over a five-year period based on back testing analysis.

Balcom disagreed.

“It’s true that more aggressive investors may want more leverage and less protection.

“Personally, I’m comfortable with the existing tradeoff: 2x leverage on a five-year, uncapped and 30% on the downside,” he said.

Longer tenor

Another “tradeoff” was the longer maturity. Investors have a longer holding period than average and must give up dividends over the five-year term, he said.

But the dividend yields on the underlying assets are not very high, he noted – 1.82% for the Dow, 1.40% for the iShares Russell 2000 Value ETF and 0.45% for the Nasdaq-100 index.

“I haven’t seen any uncapped leveraged note shorter than five years unless you have some sort of call feature,” he said.

He was referring to some uncapped leveraged return notes, usually with a two- or three-year maturity, that include a one-time automatic call after one year.

“If you want to eliminate the cap and get a decent amount of leverage, you need to extend the duration,” he said.

“I think this is a pretty good note.”

Dangerous Nasdaq

Another financial adviser considered the investment more cautiously.

“By far, the biggest risk you have is QQQ,” he said referring to the ticker of the ETF that tracks the Nasdaq-100 index. The fund is the Invesco QQQ Trust, series 1.

“The Nasdaq-100 is overpriced. The problem with overpriced assets is they can drop a lot. When the index recovers, it doesn’t necessarily go back to where it was at the top, even over five years,” he said.

He looked back at the historical performance of the QQQ Trust, series 1, adjusted for dividends.

Back to even

On March 10, 2000, the fund hit a high of 104.75. On Oct. 10, 2002, the price fell to 17.18, a nearly 84% drop in a little over two-and-a-half years. The ETF began to recover at that point, posting a new 48.74 high on Oct. 31, 2007, a new peak ahead of the upcoming bear market.

Even though the fund had recovered about 184% of its value, it still priced less than half of its high of March 2000, he noted.

Even five years after the all-time-high, investors would have been in the red, he said.

“If you bought it at the peak in March 2000 and sold it at about 35 in March 2005, you would have lost two-thirds of your money, a lot more than the 30% barrier,” he said.

Never say never

For this adviser, the current value of the Nasdaq-100 is similarly overstretched.

“Some even say that tech stocks are even more overpriced today than they were in March 2000,” he said.

“When an index plunges as much as the Nasdaq did in the beginning of the century, you could have a huge rebound for years, you’re not going to make up for the losses for a long, long time.

“Because we haven’t had a bear market in almost 13 years, people think it can’t happen to them. It’s like reading books about the Civil War. A distant history.

“I wouldn’t use this note. There’s a good probability that the Nasdaq could breach that 30% barrier.

“It’s just too risky.”

The notes are guaranteed by JPMorgan Chase & Co.

The agent is J.P. Morgan Securities LLC.

The notes (Cusip: 48132YJ22) settled on Tuesday.

The fee is 1.05494%.

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