JPMorgan’s notes tied to index basket with short tenor, buffer and no cap appeal to advisers

By Emma Trincal

New York, March 26 – JPMorgan Chase & Co.’s 0% uncapped buffered equity notes due Oct. 24, 2019 linked to a weighted basket of indexes may not offer any upside leverage but the short-tenor, the buffered protection on the downside and the uncapped upside were all very attractive features making the note worth considering, according to advisers.

The basket consists of the Euro Stoxx 50 index with a 40% weight, the FTSE 100 index with a 20% weight, the Topix index with a 20% weight, the Swiss Market index with a 7% weight, the S&P/ASX 200 index with a 7% weight and the Hang Seng index with a 6% weight, according to an amended FWP filing with the Securities and Exchange Commission.

The payout at maturity will be par plus at least any basket gain.

Investors will receive par if the basket falls by up to the buffer, which will be at least 20% and will be set at pricing, and will lose at least 1.25% for every 1% basket decline beyond the buffer.

Credit, tenor

Steven Foldes, vice-chairman at Evensky & Katz / Foldes Financial Wealth Management, said that the note would match the needs of a cautious bull.

“There are a number of things that we like here. We like the 18-month. It’s certainly within the framework we like to work with, which is under two years,” he said.

“JPMorgan credit is fine.

“The unlimited upside is good.

“And having a 20% buffer is also good.”

Still a buffer

The gearing on the buffer was not such a drawback.

“It’s not necessarily pleasant. But 20% is a very significant decline so you get a lot of protection,” he said.

“Even if the basket was down 30%, you would only lose 12.5%.”

A 12.5% loss compared to 12% with a traditional buffer of the same size is not a lot more, he added.

“The gearing is not prohibitive and it’s certainly better than having a barrier.”

Cautious play

The note would be most appropriate for a cautiously bullish investor.

“It would be an investment for someone concerned about the downside risk given the substantial run up we had in the markets, especially in 2017,” he said.

“If you’re cautious about the international markets over the next 18 months, this note makes an awful lot of sense.

“You do not receive the dividends. That’s probably somewhere between 3% and 4%. Having said that, you do get this 20% buffer. And if the market continues to go up, you get the full upside.”

The notes are not designed for the more bullish investors. Those would probably eliminate some or all of the downside protection in order to enhance the upside with leverage, he noted.

Buffer

Carl Kunhardt, wealth adviser at Quest Capital Management, said that international equity is part of his asset allocation at all times. The question is whether this note is more attractive than a long investment. His answer was a definite “yes.”

“The interesting thing in this note is the buffer because even with the gearing it gives you more protection than investing directly in the basket,” he said.

“On the upside you’re not giving up anything. There’s no cap.

“You’re giving up dividends but that’s true of almost every note.

“And it’s a short maturity. I always prefer the shorter term.”

“I think it’s a good tradeoff.”

For Kunhardt the 20% amount of protection was satisfying.

“At first I would be concerned about a potential trade war, but this is a concern you’re going to have whenever you invest in international equity. It looks like the market is getting over the tariffs fears already,” he said.

The markets were up on Monday as trade tensions eased.

Kunhardt said he also liked the basket.

Bullish on international

“It’s broadly diversified, and that’s good,” he said.

The perceived risk of a 20% decline at maturity was a function of one’s market outlook.

“Our outlook on developed countries is positive due to valuations. Those markets offer better value than the U.S. Every one of them is well positioned to do very well especially the euro zone and the U.K., which are large-cap. I’m not too concerned about volatility with large-caps indices.”

Better than equity play

The downside leverage on the buffer was also not seen as an obstacle.

“It’s not an issue. You have to be down 20%, and that’s a lot. Even if it dropped that much, your protection would be better than having a long position.”

The question is whether investors are better off with the notes or with a basket replicating the weightings through exchange-traded funds.

“You’re not worst-of. You are better off. I would do the notes,” he said.

“It’s a nice product.”

J.P. Morgan Securities LLC is the agent.

The notes are expected to price on April 20 and settle on April 25.

The Cusip number is 48129MFQ4.

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