JPMorgan’s leveraged notes on Stoxx, FTSE combine best-of, worst-of into one novel structure

By Emma Trincal

New York, Jan. 23 – JPMorgan Chase Financial Co. LLC’s 0% uncapped contingent buffered return enhanced notes with trigger event due Jan. 28, 2025 linked to the lesser performing of the Euro Stoxx 50 index and the FTSE 100 index offer an original play on correlation giving investors exposure to the best-performing index on the upside and the worst-of on the downside, according to a 424B2 filing with the Securities and Exchange Commission.

Both ways

At the center of the structure, a trigger event will determine whether investors will be exposed to the performance of the performance of the lesser performing index or to the better.

If the barrier is breached by any of the two underliers at maturity, the payout will be par plus the return of the lesser performing index.

But when the barrier is not breached, the reference asset becomes automatically the better performing index. If the better performing index is negative – and therefore down by less than 40% as the trigger did not occur – investors will get par. If it is positive, they will get par plus 1.8 times the better performing index’s return.

Limited downside risk

“So I guess it’s a best-of on the upside and a worst-of on the downside,” said Steve Doucette, financial adviser at Proctor Financial.

“It’s a five-year. I’m not too worried about the downside.

“Those two indexes plotted on a chart move relatively together. They’re pretty correlated, which is good on the worst-of side.

“And 40% is a great barrier.”

The high correlation between the U.K. equity benchmark and the euro zone index is useful in a worst-of as it lowers the risk associated with divergence, which is inherent in this type of payout.

In a best-of, however, high correlations offer less value. The odds of gaining would increase with a higher dispersion of returns.

Gravy

“The best-of is an added bonus if you can get the leverage on the best of the two,” he said.

“It’s a good thing.

“You’ve got the worst-of on the downside but a wide range of protection. That’s what you need to do to expand the range on the downside.”

Investors in the notes would have to take into account the impact of Brexit not just on the U.K. stock market but on European stocks of the euro zone, he said.

Brexit

“So far both markets have been trading in a very similar way, so will Brexit really matter? It’s something you have to decide and research,” he said.

“It will depend on how the U.K. stands on its own if it’s no longer integrated.”

The five-year tenor was a positive in his view.

“If we have a bear market, it’s enough of a timeframe to go back up,” he said.

Overall, Doucette said the notes could have a place in a portfolio.

“If you want international exposure, it’s a nice note to have.”

Hard to model

For Jeff Pietsch, head of capital markets at the Institute for Wealth Management, the complexity of the product defeated the purpose of asset allocation.

“You really need to run an analysis, plug in the different assumptions and different possible outcomes before you can even consider this because of the complexity,” Pietsch said.

“It’s hard if not impossible because you don’t know in advance if you’ll be exposed to the best or the worst of the two.”

Long-only alternative

Pietsch said he’d rather manage those two positions himself should he seek exposure to the U.K. and the European stock markets.

“If I’m bullish and want to use leverage, I use leveraged ETFs.

“It’s much easier to be tactical if you manage those exposures on your own,” he said.

Investing in the European market ahead of Brexit is more of a tactical bet, which requires flexibility the notes fail to provide, he said.

Correlation

“Brexit has the potential to create an equal drag on the economy of both regions. I don’t think either has an advantage. So it doesn’t look so good for the note.

“Besides even if you get the best-of exposure, the two indices are so correlated, it doesn’t add much value to the portfolio.

“This note could help in a low return environment because of the leverage and no cap.

“But I’d rather buy a leveraged ETF instead. I prefer simple products,” he said.

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes will settle on Jan. 30.

The Cusip number is 48132HVB5.

© 2015 Prospect News.
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