CIBC to offer series of three 2x leverage on EEM, Russell and S&P with short tenor, buffer

By Emma Trincal

New York, Dec. 18 – Canadian Imperial Bank of Commerce plans a series of three market-linked securities with leveraged upside participation to a cap and fixed percentage buffered downside due Jan. 3, 2019.

Short-term leveraged notes come with a cap but rarely with downside protection. In this series, the issuer included a buffer. Yet advisers were not necessarily impressed with the cap level, which suggests that pricing has its limits over a brief timeframe.

Each offering offers an identical 7.5% buffer. It is the cap that varies depending on the underlying.

The first offering is linked to the MSCI Emerging Markets index. The cap is between 10.5% and 13.5%, or a 12% midpoint.

The second one is tied to the Russell 2000 index. The maximum return range is 9.5% to 12.5%. The midpoint is 11%.

A third one, linked to the S&P 500 index, shows a 7% to 10% range. The cap at midpoint is 8.5%.

Diversification

Carl Kunhardt, wealth adviser at Quest Capital Management, said the notes could be used separately or combined for asset allocation purposes.

“They’re giving you something to plug a hole in your asset allocation via a structured note. If you’re bullish on any of these markets you can use this. Alternatively, you can use the ‘couch potato portfolio,’” he said.

He was referring to three equity funds from Vanguard: the Vanguard Total Stock Market index fund; the Vanguard Total International Stock index fund and the Vanguard Total Bond market fund.

“It’s a lazy way of investing. But if you need broad diversification, it will get you there,” he said.

Combining the three notes would not bring exposure to developed countries although it was possible that a similar note was in the works.

“The advantage of the notes over the Vanguards of course is that you’re getting the leverage and the buffer,” he said.

But Kunhardt objected to the upside cap levels.

Not so bullish

“They all have the same buffer, so they chose to use the volatility to raise caps, which is fine,” he said.

But even still, he said the potential returns were low.

“You’re going to hit the cap before you get the two times. So this cap could cost you 1% or 2%,” he said.

There was a significant risk to miss some of the upside, he noted, looking at each underlier’s performance this year to date: up 20% for the S&P 500 index; 14% for the Russell 2000 and 33% for the MSCI Emerging Markets index.

“I can understand the trade off: you give up a few points of gains for the protection.

“But the cap is still expensive. And you’re only getting a 7.5% buffer.

“It’s fine if you are conservative. But these are not what I would call bullish notes,” he said.

Probabilities of return

Michael Kalscheur, financial adviser at Castle Wealth Advisors, was also disappointed by the caps.

“We just got out of a very good year. Does it mean you can’t have another good year in the market? Not at all,” he said.

“I’m not a big fan of low caps, or I should say, I’m not a fan of caps in general.”

Kalscheur’s style is to extend durations in order to secure higher caps while still getting a comfortable amount of downside protection. He acknowledged that short-term products are not his favorite type.

When assessing the risk-adjusted return of a note, Kalscheur said he examines past performance to find out probabilities of outcomes.

He looked at statistics on the S&P 500 index and chose the 8.5% midpoint cap for his analysis.

Over the past 30 years, the index has been negative 26.5% of the time. It has been up and below the 8.5% cap threshold 19.2% of the time.

“Add them up and 45.7% of the time you will do better than the index, either due to the buffer or because of the leverage,” he said.

“That’s the good news.

“The bad news is you have almost a 55% chance of underperforming.”

Risk-reward

For Kalscheur, a bet on equity should yield double-digit returns.

“It’s nice to have that protection if we have a pullback in 2018. But the return is not enough for the risk you’re taking. And there is still a risk because the 7.5% buffer isn’t protecting you all that much,” he said.

Kalscheur said he sees two “schools of thoughts,” when it comes to making decisions pertaining to risk-adjusted return.

Clients concerned about risk should move into more conservative investments and agree to lower returns, he noted. But the second school of thought is that riskier equity exposure should be adequately rewarded.

“My clients would be better off in an aggressive bond fund with less risk. They would probably get more than this cap on the S&P,” he said.

“The terms of this deal are not bad. It’s the cap that just ruined it for me.”

“If the market is up 20%, clients will be disappointed.

“I know my clients well enough. I know human nature well enough. I just don’t like the caps. In general, I’m not a cap guy.

“I’d much rather go long and have the entire upside.”

Wells Fargo Securities, LLC is the agent.

All three deals will price on Dec. 29.

The Cusip number is 13605WHG9 for the notes linked to the MSCI Emerging Markets index.

The Cusip number is 13605WHE4 for the Russell-based offering.

The Cusip number is 13605WHD6 for the notes tied to the S&P 500 index.

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