Citigroup’s autocalls on ETFs pay eye-catching 17.5% premium, tapping into AI volatility

By Emma Trincal

New York, April 19 – Citigroup Global Markets Holdings Inc.’s 0% autocallable barrier securities due April 28, 2027 linked to the iShares Semiconductor ETF, the iShares Russell 2000 ETF and the Utilities Select Sector SPDR fund offer a high premium, which advisers said originated mostly from one of the three underlying ETFs, which is heavily weighted in high-growth AI stocks.

The notes will be called automatically at a premium of 17.5% per annum if the worst performing ETF closes at or above its initial value on any monthly valuation date after six months, according to a 424B2 filing with the Securities and Exchange Commission.

If the worst performing ETF gains, the payout at maturity will be par plus that ETF’s return.

Investors will receive par if the worst performing ETF declines but ends at or above its 70% final barrier and will lose 1% for every 1% that the worst performing ETF declines if it finishes below the final barrier.

Unlikely participation

Ken Nuttall, chief investment officer at BlackDiamond Wealth Management, noticed the unusual 100% participation at maturity in the absence of a call during the term.

“In March 2027 at least one of them is down. The following month they’re all up and you get the return of the worst performer. You would have to see a big jump in just one month,” he said.

“It doesn’t make a whole lot of sense. There’s not a lot of value to this. Maybe someone didn’t realize that.”

But such a feature was not so important, he noted. The real value of the note was the 17.5% call premium.

“It’s a pretty good yield on the top side. SOXX may be driving the return,” he said.

The iShares Semiconductor ETF trades under the ticker “SOXX.”

Too high

The structure was a snowball, meaning that investors only get paid when the notes are called.

Another uncommon characteristic was the great number of call valuation dates – 30 in total, he noted.

“Usually on snowballs, you don’t see a ton of monthly observations. You also get one-year no call. Six-month is pretty short,” he said.

The monthly autocall, however, offered some benefits for risk-averse investors. While they may be collecting the premium for a shorter period of time, they also have a greater chance to get their principal back when a call is triggered.

AI darlings

But Nuttall warned that potential losses at maturity should be a red flag for investors.

“You get 17% for a reason. SOXX is very volatile. It is at an all-time high,” he said.

The ETF has jumped 82% from its one-year low a year ago to its recent high of March 8.

“I would have some concerns with SOXX being at the top,” he said.

The AI-fueled rally has been spectacular with some names particularly popular. Nvidia Corp. and Advanced Micro Devices Inc. are some of the fastest movers with an 8.72% and 6.94% weighting in the ETF, respectively.

Nvidia has more than tripled in price in the past 12 months. Advanced Micro Devices has risen 80%.

Watching for spikes

“You really have to assess the risk. Getting 17.5% a year is nice. But you have to feel pretty confident about semiconductors because that’s where the volatility is,” he said.

“SOXX could go down a lot given how high the share price is right now.”

He also noted that semiconductors are a cyclical business.

“When the economy starts to decline, they don’t do well,” he said.

Nuttall said he understood the appeal of a 17.5% yield compared to rates offered with worst-of indexes.

“Calendar deals on indices would give you 8%,” he said.

One way to boost the coupons or premiums on indexes is to watch and capture for volatility spikes, he said.

Depending on how fast the VIX is moving, the adviser said he may sometimes gain an additional three percentage points on the rate of return.

Concentrated risk

The two other underlying ETFs were far less risky, he said.

“Utilities don’t move much. The Russell has rallied but is still far away from its all-time high,” he said.

Nuttall said the payout of the notes could go in two different directions.

“Either the note gets called in six months and you get your 8.75% premium. That’s good... Or SOXX is down a lot and never goes back up to these levels for the next three years, so you get stuck.

“I’m not crazy about the note. Putting in SOXX makes it a lot riskier.

“It’s a speculative play,” he said.

Monetizing volatility

Jerry Verseput, president of Veripax Wealth Management, had a positive view about the notes.

He also noticed the participation offered at maturity.

“Obviously, it’s not going to help the investor. But it may just be a parameter that influenced the way the issuer constructed the note,” he said.

Verseput liked the 17.5% call premium. He attributed it to the volatility of the semiconductor ETF.

“The options on SOXX are volatile and therefore more expensive than the other two.

“Since they sell options every month, that’s how they generate income every month,” he said.

No pure income

The adviser looked at the implications of the number of valuation dates.

“You have a six-month no-call and then monthly autocalls. Does it increase the odds of getting called and therefore, do you have more reinvestment risk? Yes,” he said.

“But I don’t look at reinvestment risk on these kinds of notes.

“Reinvestment risk comes when you rely on a 5% CD for the rest of your life. With this 17.5% yield, it’s a different game. You take it for as long as it’s available.”

Verseput said the note could fit into two different portions of the portfolio with one limitation.

“You can definitely look at it as equity replacement.

“It could also be used as income, but it shouldn’t be the foundation of an income strategy,” he said.

Sentiment change

The downside risk appeared moderate, according to Verseput.

“The 70% barrier: realistically over three years, that’s probably fine.

“Utilities tend not to move that much.

“The Russell is way below large-cap. It’s still underperforming the S&P and the Nasdaq.

“Then you get down to semiconductors.

“If AI continues to play out, semiconductors will do great. The biggest risk is if people start to think AI is overblown.

“But any investment has risks,” he said.

Positive outlook

He concluded on an optimistic note.

“AI definitely will give you some superior yield,” he said.

He said he recently worked with an issuer comparing two deals. The first one combined Microsoft Corp. and Apple Inc. in a worst-of, generating a 12% annual return. But by combining Microsoft and Advanced Micro Devices Inc., the yield jumped to 20%.

Advanced Micro Devices has approximately twice the implied volatility of both Microsoft and Apple.

“If AI continues its momentum, if we see a big demand for more chips, it will require more servers and AI will continue to do well.

“I sort of like this note,” he said.

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter.

The notes will price on April 23 and settle on April 26.

The Cusip number is 17331AZ79.

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