CIBC’s $17.08 million leveraged notes on MSCI EM designed to navigate volatile asset class

By Emma Trincal

New York, May 1 – Canadian Imperial Bank of Commerce’s $17.08 million of 0% Capped Leveraged Index Return Notes due April 27, 2020 linked to the MSCI Emerging Markets index help mildly bullish investors who are concerned about the volatility of the asset class by leveraging the upside and protecting some of the downside, advisers said.

The payout at maturity will be par plus double any index gain, capped at 21.82%, according to a 424B2 filed with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 10% and will lose 1% for every 1% decline beyond 10%.

Capped

“You can’t be gung ho too bullish on emerging markets obviously. But if you have a middle-of-the road, moderate expectation for equities as a whole and emerging markets in particular, this would be a great way to leverage that performance with a little bit of downside protection,” said Donald McCoy, financial adviser at Planners Financial Services.

The two-year cap of 21.82% with two-times leverage provides investors with a maximum annualized return of 10.4% on a compounded basis, he noted.

Opting to limit the upside for a 10% buffer indicates that investors have a moderate return outlook on this market despite its volatility.

Valuation

At the same time, the asset class remains popular among investors for its valuation, he said.

“Emerging markets are the least dirty shirt in the market. There is more room for advance than most other markets especially U.S. equities.”

Last year the iShares Emerging Markets index rose 37%. But in 2016 it was up 11% and down 16% the previous year, he noted.

“This year it’s kind of flat. Maybe next year you’ll be up 20%,” he said.

Wild moves

Because the notes have a two-year timeframe, investors may benefit from smoother averages over the period. “You’re taking out a two-year view, not a one-year view. If you look at it that way, a two-year performance could be reasonably modest despite the wild swings,” he said.

He gave the following examples:

The ETF lost 4% in 2014 and posted another loss of 16% the following year, adding up to a 20% decline for the period. Investors in the notes would have significantly outperformed the index, cutting their loss by half thanks to the 10% buffer.

The two-year period in 2012 and 2013 posted a 15% positive return. Again, investors in the notes would have outperformed the index, he noted.

“Of course, if you had bought it in 2016 when the index was up 11% and last year when it surged 37%, you would be missing out a lot. But does anyone really believe that we’re going to have these kinds of returns over the next two years?”

“By getting a little bit of protection while leveraging small gains, you can get a decent outcome.”

Asset allocation

Tom Balcom, founder of 1650 Wealth Management, said the notes should be helpful to asset allocators who want to invest in the asset class but worry about the ups and downs of the index.

“Everyone needs to allocate to international equity and emerging markets are part of it. But how do you go about an asset class that investors either love or hate?” he said.

In 2008, the iShares Emerging Markets fund was down 49%. It was up 69% in 2009. In comparison, the S&P 500 index was down 37% in 2008 and up 26.5% the following year.

“With emerging markets you can be a hero or a goat. Last year’s huge run up adds some risk of a reversal. If I invest in this asset class now, I’d be more comfortable having a buffer than nothing,” he added.

BofA Merrill Lynch is the agent.

The notes (Cusip: 136070851) priced on April 26.

The fee is 2%.

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