HSBC’s buffered AMPS tied to S&P 500 ESG index welcomed by advisers as theme is popular

By Emma Trincal

New York, April 27 – HSBC USA Inc.’s 0% buffered Accelerated Market Participation Securities due July 30, 2021 tied to the S&P 500 ESG index give advisers a tool to offer exposure to an emerging investing trend, consisting of aligning investment objectives with environmental, social and governance (ESG) values.

The payout at maturity will be par plus 1.1 times any index gain, capped at par plus 10%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 10% and will lose 1% for each 1% decline beyond 10%.

The S&P 500 ESG index is tracks the performance of stocks meeting sustainability criteria, while maintaining similar overall industry group weights as the S&P 500 index, according the prospectus. It was published for the first time on Jan. 28, 2019.

The index since it is derived from the S&P 500 index can serve as a benchmark as well as the basis for index-linked investment products, according to S&P Dow Jones Indices.

10% club

Carl Kunhardt, wealth adviser at Quest Capital Management, said getting exposure to this type of asset class can be useful.

“I have several clients who are looking for this type of investing. ESG is not new. It used to be called socially responsible investing or SRI.”

But there are differences.

“With SRI you had “sin stocks.” The client would say, ‘I don’t want tobacco, or alcohol or gambling in my portfolio.’

“It’s a little bit different today with ESG. They’re looking at companies that are good for the environment or have good governance. It’s much broader and it makes sense.”

Negative screening

About 10% of Kunhardt’s clients are interested in investing assets in ESG stocks.

“I’m comfortable with ESG because I look at this rationally. If my clients want these types of investments, I’m happy to help them with this kind of allocation,” he said.

“I’m also looking at the numbers.

“Ten years ago, there was a price to pay in excluding sin stocks. Now if you compare ESG and the broader market, the performances are fairly identical. You’re not really paying that performance premium anymore,” he said.

The index’s broad market exposure and industry diversification result in a return profile similar to that of the S&P 500 index, according to a factsheet published by S&P Dow Jones Indices.

Eligibility

The S&P 500 ESG index excludes some companies based on their activities such as those involved in the sale of tobacco or “controversial” weapons but also companies not in compliance with some sustainability principles published by the United Nations (UN Global Compact). In addition, those with S&P DJI ESG scores in the bottom 25% of companies globally within their industry groups are excluded.

“They’re not putting every stock in the index. They’re filtering based on ESG criteria. But the good news is that today, when you invest ESG style, you’re no longer paying a performance penalty.”

Kunhardt noted that big oil company Exxon Mobil Corp. is not designated as ineligible.

“Exxon is not excluded because they’re a big proponent of green energy,” he said.

“At some point in the future, no one really knows when exactly, fossil fuels are going to run out. They’re planning for the future. They’re still an oil company obviously, but they’re also subsidizing green energy initiatives.”

Structure

Kunhardt said he also liked the notes.

“Looking at the note itself, I like the short-term. I like the 1.1 leverage. It’s not a lot of leverage but it’s better than one-to-one. I like the 10% buffer. I am not getting the dividend but it’s a short-term note,” he said.

Having no cap over the 15-month tenor was also a plus.

“Right now, we can’t rely so much on the fundamentals because earnings are at ground zero. But at least technical analysis gives us some indication that the market is trending upward.

“I am betting the market is going to continue to climb higher. So, having 1.1 times leverage and no cap is good.

“And if I’m wrong, I have 10% below me.”

Some exclusions

Steven Foldes, vice-chairman of Evensky & Katz/Foldes Financial Wealth Management, also liked the product, especially the underlying.

“It’s an interesting note,” he said.

ESG investing is important for many clients so giving them exposure to this type of investments is relevant, he said.

He was surprised, however, to see among the “non-eligible” names some very large companies, which were eliminated because their scores were deemed “not high enough” to warrant selection, not as a result of being involved in non-eligible activities such as tobacco or defense.

Among those: Alphabet Inc., Netflix Inc., Johnson & Johnson, Home Depot Inc., Walgreens Boots Alliance Inc., Allstate Corp., Lennar Corp. and more than 100 more.

“You have to wonder why these companies are excluded,” he said.

Helpful tool

But on the positive side, Foldes said the underlying index provided a useful exposure.

“There are clients who are increasingly asking for socially conscious investments and we fully appreciate their motivation.

But it’s a challenge for advisers. When you’re dealing with mutual funds and ETFs you don’t have the ability to exclude sin stocks.

“Unless you build portfolios yourself with single stocks...but very few advisers do that... it’s increasingly problematic to offer a solution to those clients.

“The ESG index provides a nice opportunity to accommodate them.”

Rich

Looking at the note itself, he pointed to the high commission of 1.875%.

“We don’t have a problem with HSBC’s credit quality.

“But we do have a problem with the 1.875% commission. It’s very high for just over a year.”

As with any other structured notes, investors must forgo dividends.

“Assuming the dividend yield is the same as the S&P 500 at 2.15%, you’re giving up 2.675% over 15-month.”

Performance

The S&P 500 ESG index has outperformed the broad benchmark, according to an S&P Dow Jones Indices fact sheet published on March 31.

The annualized return of the S&P 500 ESG index over the past five years has been 9.87% versus 6.73% for the S&P 500 index. Over the past year, the ESG index showed a 1.97% return versus -6.98% for the S&P 500 index.

More leverage wanted

Foldes liked the underlying. But he was not totally satisfied with the structure of the notes.

“My problem here, aside from the high commission, is that there is not enough leverage,” he said.

“It’s very nice to have a 10% buffer with only 10% in leverage if you are pessimistic.

“But over a 15-month period, I would think the market will have recovered. Science will ultimately prevail; we will have some therapeutics against Covid-19. It’s nice to have an uncapped return. But I’d like to see more leverage and less principal protection in order to capture the upside.”

HSBC Securities (USA) Inc. is the agent.

The notes will settle on Thursday.

The Cusip number is 40438CEM9.

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