JPMorgan’s $35.4 million uncapped buffered leveraged notes on Stoxx offer alternative to ETF

By Emma Trincal

New York, May 3 – JPMorgan Chase Financial Co. LLC priced $35.4 million of uncapped buffered return enhanced notes due Jan. 12, 2024 linked to the Euro Stoxx 50 index, according to a 424B2 filing with the Securities and Exchange Commission.

The notes are guaranteed by JPMorgan Chase & Co.

If the index return is positive, the payout at maturity will be par plus 1.565 times any gain.

If the index declines by up to 10%, the payout will be par. Investors will lose 1% for each 1% decline beyond 10%.

“As a replacement for a long only position, it looks like a great trade,” said Tom Balcom, founder of 1650 Wealth Management.

“They put together a 10% buffer, the leverage, the no-cap, all of that over a short holding period. That’s unusual. It makes the structure quite attractive.”

No big reversal yet

The Euro Stoxx index has been a source of disappointment for many portfolio managers due to its lackluster performance, he said.

“We have a three-year note on the Euro Stoxx maturing in a couple of months. The price return has only been about 8% in the past two years and 10 months.

“That’s why leverage is so important. The 1.56x upside is nice here,” he said.

“You have to be patient with the Euro Stoxx 50. For years people have expected a reversal to the mean. But it hasn’t really happened yet. At some point it will.

“With the return enhancement, you could easily outperform on the upside if Europe has a recovery.”

While noteholders, unlike shareholders, do not have the benefit of receiving dividends, the leverage should help, he added.

“Even without the dividend, you can still outperform because you have enough leverage in there to offset the loss,” he said.

Risks, tax harvesting

On the downside, he noted that Europe faces some risks of a recession, making the buffer all the more useful.

“There are plenty of geopolitical risks 20 months from now. But those risks are unpredictable. You can’t model that. If you’re worried about the war in Ukraine and other risks in Europe, you should be in cash,” he said.

As an asset allocator, Balcom said he has an international equity bucket in his portfolio, which includes European equities.

“If you have exposure to Europe, this is a good substitute to a long position,” he said.

The notes could also be used as part of a tax-harvesting strategy.

“If you have a loss in a long Europe position, you can sell it to reduce your taxes while replacing it with the notes. It’s a substitute and you create some downside protection along the way. You’re enhancing your portfolio by better managing your taxes and your risk.”

The 20-month term with the notes expiring in January 2024 did not surprise him.

“Chances are they did it to push back the tax liabilities for a later date, on the following year. With an 18-month, they couldn’t have done that,” he said.

Entry point

Donald McCoy, financial adviser at Planners Financial Services, pointed to the timing of the entry, saying that the trade took place at an opportune time.

On the strike date, the underlying priced at 3,721.36, or 15.5% off its 14-year high of November 2007.

“You’re getting in at a discount. In addition to that, you have a 10% buffer.

“The buffer is not big but it’s better than a barrier. If you’re down 15%, you only lose 5%,” he said.

Short tenor

McCoy also pointed to the slow returns of the Euro Stoxx 50 index.

The three-year trailing return of the SPDR Euro Stoxx 50 ETF, which tracks the index, is only 2.52%, according to Morningstar.

But having no cap on the upside was still beneficial to investors in the event of a rebound, he noted.

“We may have an uptrend. Inflation may be gone, the war in Ukraine could be over.

“And even if you have modest expectations, if it’s up only 5%, you get close to 8%,” he said.

In fact, McCoy was wondering how the notes could have been priced with a hard buffer, leverage and no cap on such a short-term duration.

“How do they do that? I guess, as always with those notes, you have to give up the dividends; otherwise, they couldn’t give you those terms,” he said.

“Still, it seems like a fair trade-off to me.”

The index dividend yield is 3.15%.

“It’s a high yield but a very short period of time,” he said.

The leverage makes up for the “loss” of dividends, which remains limited due to the short compounding period, he explained.

If the tenor had been longer, the entire structure would have changed, he noted.

“The 20-month holding period is satisfactory,” he said.

European exposure

European stocks may be slightly less volatile than domestic markets, but the region faces a number of headwinds, he said.

“Obviously there’s still a lot of risk in Europe. The war could be escalating. Inflation could get worse. But you do have a 10% buffer. It’s not a ton of protection, but it is some. And you’re already getting in at a lower price, which mitigates the risk too,” he said.

In conclusion, McCoy said the notes had some appeal.

“It seems like a pretty good option for people who want to have exposure to the European stock market while minimizing some of the risk.

“If you’re going to have exposure to this asset class anyway, you might as well do it with a little bit of a hedge,” he said.

J.P. Morgan Securities LLC is the agent.

The notes settled on Monday.

The Cusip number is 48133FWN1.

The fee is 0.10874%.

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