CIBC’s buffered digital notes tied to S&P 500 designed to ride the long bull on its last legs

By Emma Trincal

New York, March 9 – As the bull market reached its eighth year anniversary on Thursday, some investors are expecting slightly modest gains or even a correction, focusing more than before on protecting their capital than scoring high gains. Canadian Imperial Bank of Commerce’s 0% buffered digital notes due March 12, 2020 linked to the S&P 500 index are designed to accommodate this range bound view of the market over the next three years while providing a buffered protection, advisers said.

But the upside cap may not be enough for those who see the bull market run extending a few more years.

Long ride

“This is the second longest bull market we ever had,” said Steve Doucette, financial adviser at Proctor Financial.

“We’re going to have an adjustment, but who’s to say we’re not going to have the longest bull market in history? We just don’t know.”

The longest bull market lasted more than 12 years from 1987 to 2000.

If the index return is zero or positive, the payout of the notes at maturity will be par plus 20%, according to a 424B2 filing with the Securities and Exchange Commission.

If the index falls by up to 17%, the payout will be par.

If the index falls by more than 17%, investors will lose 1% for every 1% decline beyond the buffer.

Cap in focus

“It’s a pretty straightforward note, but it’s more bearish than bullish because of the cap,” said Doucette.

“I haven’t looked at pricing on the S&P for a while. It’s the outperforming asset class. We like to look at what doesn’t perform so well.

“We’ve done some international equity. There’s more volatility and you can get either a larger buffer or leverage with no cap. International equity gives you better terms.

“I’d have to go back to the S&P and see what you can get.”

Doucette picked a scenario in which the S&P 500 index would show a decent performance of 10% a year during the next three years.

“At maturity you don’t capture the full 30% of the market. You give up 10%, which isn’t bad because you’re still getting 20% of it,” he said.

“I guess it really depends on how bullish you are.

“I’d like to see a higher cap just in case the irrational exuberance resumes.”

Buffer

But a look at the risk-adjusted profile of the product made him less inclined to view the notes as a good fit for his clients.

“You’re capping yourself at 6.6% a year. You have 83% exposure to the downside and only 20% to the upside.

“That balance doesn’t register for me,” he said.

The 83% exposure is the maximum buffered in the worst possible scenario, in which the index would have lost 100% of its value at maturity.

While a 17% buffer appears attractive, it would not help much in a bear market scenario, Doucette added.

“Let’s redo 2008 when the market was down 37%. You’re still losing 20%, and the most we’re going to get is 6.6%,” he said.

“If we’re going to expose our clients to equity, we ought to get them 8% to 10% at the very least.”

The notes would definitely outperform in a flat market however.

“If it’s flat or up a little bit, you capture 20%, which is a very neat outperformance. But you have to be pretty confident that three years from now you’re not going to be up that much. You definitely don’t want to be up more than 20%.”

Sideways

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said the upside may fit his current outlook on the market.

“It’s an interesting note. Our view on the S&P for the next few years is mid-single digits,” he said.

“I’m not too worried about the cap at this time.

“I do like the digital component to this note because on the heels of a long bull market, we are due for a pullback, which, I don’t think will be long and sustained.

“The digital makes this note attractive in light of some of the potential headwinds we may have.”

Keeping the exposure

The eight-year old bull market has pushed the S&P 500 index up 245%, causing many market analysts to express concern about the likelihood of a correction soon.

“We don’t expect the bull to last forever,” Medeiros said.

“But the market is priced in to optimism regarding policy decisions that may be beneficial to the economy.

“So there’s a case to be made that there may be another leg to it even though equity prices are still very expensive,” he said.

BNP Paribas Securities Corp. is the agent.

The digital return will be at least 20%. Its exact amount will be set at pricing.

The notes priced Thursday.

The Cusip number is 13605WCM1.

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