First ETF on FTSE 100 due to launch this month; bid for notes should follow, source says

By Emma Trincal

New York, March 10 – The volume of U.S. structured notes linked to the FTSE 100 index is notably weak, according to data compiled by Prospect News, but things may change soon after the launch of a new exchange-traded fund in the United States, the only one of its kind to track the performance of the U.K. large-cap benchmark.

Last year only three notes tied to the FTSE 100 index priced in the United States totaling $11 million, a meager supply compared to nearly $6 billion in 821 offerings linked to the S&P 500 index, according to the data. So far this year, two FTSE-based offerings priced for $6 million in total.

First ever

“At the present there are no ETFs tracking the FTSE in the U.S., but Recon Capital is launching one on the 24th,” Mark Benhard, a spokesman at the London Stock Exchange Group, told Prospect News.

He added that the date could change last minute.

“The launch date can always slip back as these things go.”

With the first-ever U.S. ETF linked to the FTSE 100, it is likely that the market will see more notes linked to this benchmark, a sellsider predicted.

“FTSE is a major index. But the addition of an ETF matters from a marketing standpoint. People will know about it. Investors like instruments linked to something they know,” he said.

“I don’t believe that people buy structured notes for access because there is no existing ETF. On the contrary, name recognition is more important than anything else. The more people can access a particular market through an ETF, the more demand you’ll see for notes on this particular market.”

He refuted the notion that the lack of any existing ETF was a factor behind the low supply of FTSE notes.

“FTSE is a global index. As such there is already a lot of global liquidity. You can hedge it. Issuers have plenty of liquidity. But having an ETF always helps. It gives data point. It brings transparency,” he said.

The most recently announced deal linked to the FTSE 100 came from HSBC USA Inc., which plans to price 0% Accelerated Market Participation Securities due March 13, 2018 linked to the index. The notes will have five times upside leverage and a 53.5% cap. Investors will be exposed to any losses, according to an FWP filing with the Securities and Exchange Commission.

For bulls

“If you’re bullish in the U.K., that makes a lot of sense,” said Tom Balcom, founder of 1650 Wealth Management.

“The annualized cap is more than 15%. As an investor you go for the double-digit returns. You want to outperform the index. The three-year performance of the FTSE is only 8.26%. If you think the market is going to be up, you want to put all the odds in your favor, and the five times leverage will give you a higher probability of success versus being long-only.

“Also given the lack of downside protection, you have to be confident in your bullish bet.

“This note is for someone who has a particular viewpoint on U.K. stocks, who is bullish on this market but not a raging bull, otherwise you run the risk of being capped out.

“You get the cap if the index goes up by 3.5% a year. That’s not a lot.

“For anyone who believes returns will be muted for the next three years, this is a way to magnify the potential gains.”

The five times leverage on the upside is unusual, he said.

“You don’t see that very often, at least I haven’t. It really gives you more boost,” he noted.

“On the downside, the only thing you’re missing out are the dividends.”

Leverage

Juin Chin, senior investment analyst at Modera Wealth Management, LLC, said he would not invest in this type of product because his firm avoids making single-country bets.

“That said, 15% a year is a pretty attractive return for equities. Here at Modera, our expectations for U.S. equities are between 6% and 8%. For international stocks, it’s a bit higher in the 7% to 9% range,” he said.

“Because of the high leverage, you don’t need a lot of capital to participate. That’s a plus.”

One less positive aspect was giving up dividends. The dividend yield of the FTSE 100 index is 3.4%.

“You don’t participate in dividends. Over three years it’s more than 10% in return that you’re missing,” he said.

“On the other hand, the asymmetry of leverage is very appealing. If you were to replicate the five-times exposure with the index directly, you would get five times leverage on the upside but also five times on the downside.

“This makes it attractive for someone who wants to make a special bet on the U.K. for a fifth of the capital outlay.”

The notes, however, would not be adequate for his clients as Chin said he avoids leverage.

“We are pretty plain vanilla when it comes to managing our clients’ wealth. We don’t really go out and seek structured notes unless a client requests it. In general we tend to shy away from counterparty risk,” he said.

HSBC Securities (USA) Inc. is the agent.

The notes will settle on Friday.

The Cusip number is 40433BH43.

© 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.