Citi’s $8.71 million barrier digitals on S&P, ARK ETF seen as ‘interesting’ speculative play

By Emma Trincal

New York, May 16 – Citigroup Global Markets Holdings Inc.’s $8.71 million of 0% enhanced barrier digital securities due June 15, 2023 linked to the worst performing of the ARK Innovation ETF and the S&P 500 index offer a good risk-adjusted return for speculators who feel confident about having exposure to a very volatile technology fund, advisers said.

If neither index has ever closed below its 50% barrier level during the life of the notes, the payout at maturity will be par plus 28%, according to a 424B2 filing with the Securities and Exchange Commission.

Otherwise, investors will be fully exposed to any decline of the laggard index or receive par if both indexes finish at or above their initial levels.

Disruptive technology

“You’re really buying a structured note around the ARK ETF, not the S&P,” said Jerrod Dawson, Director of investment research at Quest Capital Management.

“I can’t imagine the S&P being the worst-of in a down market. The S&P could be the worst-of if the market rallies but in this case, you would get the 28% anyway.”

Created in October 2014, the ARK Innovation is an actively managed ETF that seeks long-term growth of capital by investing in stocks of companies that follow a theme of “disruptive innovation.”

The concept of “disruptive innovation” is defined by Cathie Wood, the fund’s portfolio manager and founder of ARK Investment Management LLC, as “the introduction of a technologically enabled new product or service that potentially changes the way the world works.”

“You want to qualify the client, make sure they want exposure to the ARK, which is a very volatile ETF,” said Dawson.

The top holdings in the actively managed ETF are Tesla Inc. with a 9.7% weighting, Coinbase Global Inc. with a 6.8% weighting, Teladoc Health Inc. with a 6.6% weighting, Roku Inc. with a 6.4% weighting and Zoom Video Communications Inc. with a 6.2% weighting.

Big drawdown

“The 28% digital is very robust, especially if you get it when the index is negative. As long as the barrier is never breached, the ETF could be down 49% [and] you would still get the 28%.

“I don’t hate that note.

“It’s just a speculative bet for someone who wants the exposure to this concentrated, volatile underlying.

“As a bet, you just have to do it for a small portion of your portfolio,” he said.

The daily observation of the barrier (“American” barrier”) was the main structural risk. The volatility of the fund also increased the risk of a barrier breach despite the low strike.

When the deal struck, the ARK Innovation ETF closed at $45.63, or nearly two-thirds below its 52-week high of $132.50 in June. The S&P 500 index closed about 15% off its January high at 4,123.

Dawson pointed to the skills of the fund’s portfolio manager.

“She is very charismatic; she tells a compelling story. With her fund plummeting, she lost a great deal of credibility, more than she should have. Her picks are companies that move forward with disruptive technologies and high growth potential.

“One could argue that with the price of the ETF already down so much, you’re getting a good entry point.

“If you want exposure to this fund, the risk-reward tradeoff is actually quite good,” he said.

American barrier

Jerry Verseput, president of Veripax Wealth Management, held a similar view.

“It’s a purely speculative bet,” he said.

“You don’t need to worry about the S&P. This is a note on the ARK.

“I don’t really care about those American barriers. You get one weird day, it pops that barrier and now, you’re in a completely different note.

“At the same time, you’re getting a huge return of 28% even if you’re halfway down.”

Room for further drop

Investors would have to estimate how likely the fund is to drop another 50%. From the $45.63 price on the strike date the barrier is set at $22.815.

“It’s pretty low. Last time we hit that level was in 2017. So, it’s pretty safe, at least it looks that way.

“At the same time, the 50% level can be misleading,” he said.

“It’s my contention that the market has a memory and that the stock price is going to move in relation to its $132 high, not the initial price.

“People look at previous highs. They look at what the price used to be.

“Today, the stock is already 10% off the initial price.”

The share price of the ARK Innovation ETF closed at $41.02 on Monday, or 10.1% below the $45.63 level.

“Why is it still moving down and so fast? Because it’s moving in relation to the high,” he said.

“If we have a recession within the next 13 months, which is possible, that 50% drop could happen.

“This is still an interesting note, but not for everyone.

“It’s a purely speculative trade. Small position. Sure, let’s give it a try. But I wouldn’t see it as a core investment strategy.”

The notes will be guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter.

The notes settled on Friday.

The Cusip number is 17330FTG6.

The fee is 0.25%.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.