Citigroup’s buffer securities linked to Dow ETF structured around capital preservation

By Emma Trincal

New York, Nov. 21 – Citigroup Global Markets Holdings Inc.’s 0% buffer securities due Nov. 26, 2024 linked to the SPDR Dow Jones Industrial Average ETF trust offer some downside protection for investors willing to give up leverage on the upside over a relatively long holding period.

The payout at maturity will be par plus any ETF gain, up to a maximum payout of par plus 50% to 55%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the ETF falls by up to 20% and will lose 1% per 1% drop beyond 20%.

Safer play

“This is a pretty straightforward note,” said Matt Medeiros, president and chief executive of the Institute for Wealth Management. “I like it.

“The five-year term is not a concern because this is a core asset class in the portfolio. You’re getting some upside exposure for the next five years.”

The obvious benefit of the note was the downside protection.

“Getting a buffered exposure to this index at this stage of the market does make sense.”

As the Dow recently hit an all-time high, climbing above the 28,000 level for the first time last week, many see the need for protection as more relevant than before. Some anticipate a bear market followed by a strong rebound, in which case capping the upside over a five-year term may be problematic. But Medeiros said he did not share that view.

“We’re not going to have a big correction followed by a big bounce back. So, I’m comfortable with the one-to-one exposure up to this cap of 10% to 11% per year,” he said.

“The 20% buffer is a very reasonable level of downside protection. I’m comfortable with that too.”

Unidirectional

Steve Doucette, financial adviser at Proctor Financial, said the protection came at the cost of giving up too much upside.

“There isn’t a lot to get excited about with this deal,” he said.

“Five years out, you’re long the index up to a cap. The only advantage you get is this buffer,” he said.

“The only time you’re outperforming is if the market is down. That’s a pretty focused call to make on the market.”

Investors also have to give up the 2% of dividend yield, which shareholders of the underlying ETF will receive.

“You’re not going to outperform on the upside. In fact, you’ll underperform since you’re not getting the dividends,” he said.

“I’m not sure why you’d be locking yourself out for five years, giving up the dividends. You don’t have a chance to outperform on the upside.”

Leverage wanted

Doucette would rearrange the terms of the deal in order to participate in a potential rally, which he expects over the next five years.

“I’d give up some of the buffer and look for leverage,” he said.

“That way you can make up for some of the dividend loss and hopefully outperform also on the upside.

“Five years out, the market could go down and come back very quick.

“We know we’re due for a bear 10 years into this bull market. But it doesn’t mean you’ll end up negative in five years. The market will recover.

“The terms of the notes are only favorable on the downside. You want to expand the range of positive outcomes.

“Why not doing a worst-of with multiple indices? That way you can expand the range of possibilities and capture some outperformance on the upside.”

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter.

The notes will settle on Nov. 26.

The Cusip number is 17324XUL2.

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