Advisers opt for worst-of on S&P, Russell versus notes on Russell only as terms are better

By Emma Trincal

New York, March 24 – Advisers compared two notes with the same tenor and the same leverage factor, one of which is tied to a worst-of, the other to a single index. Both said they would rather use the worst-of as it provides more attractive terms.

The first upcoming deal is JPMorgan Chase Financial Co. LLC’s 0% capped buffered return enhanced notes due Oct. 3, 2024 linked to the performance of the S&P 500 index and the Russell 2000 index.

If each index finishes above its initial level, the payout at maturity will be par plus 200% of the least performing index’s return, subject to a maximum payout of par plus 23.25% to 27.25%. The exact maximum return will be set at pricing.

If the least performing index finishes flat or falls by up to a 15% buffer, the payout will be par.

The second issue – Citigroup Global Markets Holdings Inc.’s 0% market-linked notes due Oct. 4, 2024 linked to the Russell 2000 index – also will pay par plus 2 times any index gain, subject to a cap of at least 20%. The buffer on the downside is 10%.

The final cap levels for both offerings will be set at pricing.

Russell pick

Steve Doucette, financial adviser at Proctor Financial, said that whenever he buys a structured note, his choice is guided by the need to outperform on both directions. From the exposure standpoint, his preference goes to the Russell 2000 index.

“Small caps have come down harder than large-cap. So, the smarter investment is in the Russell. But the cap is too small for that Russell note,” he said.

“I’d go with the worst-of, take that U.S. exposure. Two-and-a-half years out, there are pretty good odds I can outperform in either direction unless the index goes up above the cap. It’s less likely to happen with the note that has a higher cap, and that’s the worst-of.”

Generating alpha

Doucette used the midpoint as a hypothetical cap since JPMorgan’s filing disclosed it in a range. A 25.25% cap would be the equivalent of a 9.42% annualized compounded return. In comparison, the 20% cap for the Citigroup deal represents a compounded return of 7.57% per year.

In both deals, the buffer was advantageous, he said.

“Bear markets come and go so fast. We don’t know if we’re going to see one in the next six months or in the next two years,” he said.

Simple tradeoff

However, Doucette, who focuses on relative returns versus the benchmark, viewed the risk more on the upside than on the downside.

“On both notes, you know the buffer will allow you to outperform on the downside. The only way you underperform is if the market goes up and you get capped out,” he said.

“So, I may reduce the buffer to get a higher cap. Maybe go from a 15% to a 10% buffer. It’s easier to do that with the first deal since it already has a bigger buffer and a higher cap.

For this adviser, both notes have value, but his choice was about tolerating a worst-of exposure in order to achieve better terms.

“It’s a simple tradeoff. If you don’t want the risk that goes with a worst-of, the terms aren’t going to be as good. It makes sense,” he said.

If reducing the buffer size was not enough to enhance the cap up to a desirable level, Doucette would consider reducing the leverage as well.

“I would try to get that cap up by decreasing the size of the buffer a bit or some of the leverage or even both. Maybe try 150% leverage and a 10% buffer.

Raising the cap would be his priority.

“You don’t want to underperform the market on the upside,” he said.

Worst-of preferred

A financial adviser reached a similar conclusion.

“Both notes are tied to broad indices that are relatively easy to track. I like that,” he said.

“I like both deals, but when it comes to the structure, I would be more inclined to do the worst-of.

“The S&P is a little bit higher in valuation versus the Russell. But both have upside potential over the next couple of years.”

This adviser said it was worth getting the worst-of exposure for the better terms.

“Over a two-and-a-half-year period, you get single-digit returns on a compounded basis. That’s in line with our expectations. But I’d still want to have the higher cap,” he said.

For the downside, one can be “cautiously optimistic”, he added.

“I’m certainly concerned about the risk of a bear market in that timeframe. But that’s why you have a buffer. The bigger the buffer, the better. I remain cautiously optimistic though because the current economic environment still looks good.”

The JPMorgan notes are guaranteed by JPMorgan Chase & Co.

The deal (Cusip: 48133DPV6) will price on March 28 and settle on March 31.

J.P. Morgan Securities LLC is the agent.

Citigroup Global Markets Inc. is the underwriter of the second issue.

The guarantor is Citigroup Inc.

The notes (Cusip: 17330AN81) will price on March 30 and settle on April 4.

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