UBS’ capped gears on stock basket offer customized exposure, alternative to ETFs

By Emma Trincal

New York, Aug. 10 – UBS AG, London Branch’s 0% capped gears due Aug. 15, 2025 linked to an equity basket of equities provide exposure to several semiconductor and automobile stocks probably selected for a client, said Tom Balcom, founder of 1650 Wealth Management.

The basket includes the common stocks of Analog Devices, Inc., Albemarle Corp., Advanced Micro Devices, Inc., Aptiv plc, Ford Motor Co., General Motors Co., Microchip Technology Inc., Nvidia Corp., NXP Semiconductors NV, Plug Power Inc., Skyworks Solutions, Inc., TE Connectivity Ltd., Tesla, Inc., Texas Instruments Inc. and Uber Technologies Inc., according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus two times any basket gain, up to a maximum return of par plus 50% to 55%. The exact maximum return will be set at pricing.

If the basket falls by up to 30%, the payout will be par.

Otherwise, investors will lose 1% for each 1% decline from the initial basket level.

Intriguing

Balcom said he liked the concept of an underlying basket. This particular underlying caught his attention.

“It’s unique, and that’s what’s interesting. You have semiconductors, auto and industrial stocks in there. I guess the selection was probably based on a client’s request, someone who wanted exposure to these specific names. I like the fact that it’s unique,” he said.

The 70% barrier is adequate, this adviser said.

“There’s a very good chance that we’ll have a recession within the next four years. On the other hand, on a four-year term, the probability of breaching the barrier is pretty low,” he said.

Risk mitigation

As with most leveraged notes offering some protection, a cap had to be included to make the pricing work.

“This is not a note for someone who’s very bullish on those stocks,” he said.

“If the basket goes up too much, you quickly get capped out.”

The cap on an annualized compounded basis is 11.13%. The basket only needs to rise 6% per year to reach the maximum return.

“This is a note designed for clients who want to reduce risk, not for bulls. You give up some of the upside, but the note provides the protection on the downside,” he said.

“That’s why people buy structured notes.”

New twist

Balcom said he sees more and more demand for notes linked to baskets of stocks as part of a general trend.

“Our clients like to customize their exposure. We’re doing those baskets for them. I call that: ‘indexing with a twist,’” he said.

Recently his firm needed to create a note on transportation stocks.

“There is an ETF but for some reason, it didn’t work out. So, we decided to use a few transportation stocks and created a basket. It’s not as broad as an index or a fund, but it’s still diversified. And the client gets a say in the composition of the basket.”

Semiconductors

Balcom noted the overrepresentation of semiconductor stocks, which accounted for seven out of the 15 basket components. Those are Analog Devices, Advanced Micro Devices, Microchip Technology, Nvidia, NXP Semiconductors, Skyworks Solutions and Texas Instruments.

“They trade at elevated prices, that’s for sure,” he said.

“That’s why you want a diversified basket with downside protection.”

Balcom concluded that the industry will see more of those equity basket-linked notes in the future.

“They’re becoming more popular. They allow the end-user to customize their viewpoint,” he said.

Overpriced basket

For Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments, the basket had a valuation problem.

“There’s a lot of semiconductors, which have never been more overpriced in their entire story. Whether you look at price-per-earnings, price-to-book or any other metrics, prices are way out of line,” he said.

The P/E of Nvidia for instance is 96.30. Microchip Technology has a P/E of 86.92 and NXP Semiconductors of 58.7.

Stocks in other industries are also considerably overvalued, he noted. The “worst of all” remains the stock of carmaker Tesla with an astronomical P/E of 368.52.

History repeats itself

“If those stocks collapse, they won’t be able to get back close to where they are today,” he said.

“After the crash of March 2000, it took the Nasdaq 17 years to recover without even adjusting for inflation.

“That’s a very long time.

“Could this basket be down 30% four years from now? Absolutely. That’s why this barrier in my opinion is not going to be enough except for General Motors and Ford.”

These two car stocks have the lowest valuations. General Motors’ P/E is 6.39 and Ford’s, 16.13.

UBS Securities LLC and UBS Investment Bank LLC are the agents.

The notes will price on Thursday and settle on Aug. 17.

The Cusip number is 90279B639.

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