JPMorgan’s notes tied to S&P offer leverage, protection as index soars; cap might clip wings

By Wendy Van Sickle

Columbus, Ohio, July 16 – JPMorgan Chase Financial Co. LLC’s 0% capped buffered return enhanced notes due Jan. 29, 2021 linked to the S&P 500 index offer a simple structure that’s linked to an index that’s enjoying a soaring all-time high at present.

One in a long line of capped BRENs from the issuer, this note offers two times leverage, subject to a maximum payout that is expected to be par plus between 11.5% and 15.5%. The cap will be set at pricing, but assuming it’s within that range, the maximized annual return, based on the 18-month term, would be sitting somewhere between 7.67% and 10.33%.

The note offers a hard buffer of 10%, meaning that investors would be immune to the first 10% of losses and have 1-to-1 exposure to losses beyond 10%.

How’s the timing?

The S&P 500 is roaring to record highs, closing Monday at 3,014.13, up about 200 points from a year ago and up more than 650 points from late last year when it closed as low as 2,363.12 on Dec. 26, 2018.

In this environment, with the underlier hitting all-time highs, the buffer becomes particularly attractive, according to Steven Foldes, vice-chairman at Evensky & Katz/Foldes Financial Wealth Management.

Foldes said if he were restructuring the note, he might prefer a little larger buffer or larger cap in exchange for a little less leverage, although he said the two times leverage is “great” too.

“If we have a really modest result over the next year and a half, we multiply it by two,” he said.

Foldes said the 7.67% annualized return offered by the low end of the potential cap range is about as low a yearly return as he considers reasonable for the note.

The cap is also what most troubles Michael Kalscheur, financial adviser at Castle Wealth Advisors.

Kalscheur acknowledged that he typically only deals with notes that have terms of five years or more, but, with that caveat, he said that in any case his way of assessing whether a note is worthwhile is asking, “Does the note give me a chance to outperform the market two out of three times?”

The way Kalscheur sees it, this note is likely to beat the market one out of two times.

“There’s a very high chance this thing is going to get capped out, and we’re going to be leaving money on the table,” he said.

However, he said, for a client who has the specific expectation that the index will gain over the duration of the note, but only modestly, the note could work, he said.

“If you’re expecting mid-single digit-type returns, this might be the product for you,” he said.

Kalscheur sees only the top of the possible cap range – 10% or more – as an acceptable maximum yield.

“If you’re not talking 10% or more, it makes me wonder why you’re getting into it,” he said, adding that investors who are sour on the market outlook would be much better served by a structured note that offers an absolute return, such that if the underlying index falls by up to a certain amount, the investor actually sees a positive return in proportion to the loss.

“Or get out of equity completely,” he said.

“Caps on equity always rub me the wrong way,” Kalscheur said, pointing to high-yield bonds as an alternative way of getting a 7% to 9% yield with half the risk.

Foldes, though, who prefers notes with terms two years and under, said he sees this one, with its reasonable return assuming the 9% center-point of the potential annualized yield, “nice buffer,” credit-worthy issuer and relatively short duration, as worth considering.

“It’s not a bad note at all,” he said. “We think that the note definitely has merit.”

J.P. Morgan Securities LLC is the agent.

The notes will price July 31.

The Cusip number is 48132C2H5.

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