Barclays’ Phoenix autocall tied to homebuilders ETF offer economically sensitive sector play

By Emma Trincal

New York, Aug. 31 – Barclays Bank plc’s phoenix autocallable notes due Sept. 3, 2021 linked to the SPDR S&P Homebuilders exchange-traded fund may be too risky a bet on the economy, advisers said.

The notes will pay a contingent quarterly coupon at an annual rate of 11.55% if the fund closes at or above its 75% coupon barrier on the observation date for that period, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par plus the contingent coupon if the fund closes at or above its initial level on any quarterly observation date other than the final date after one year.

The payout at maturity will be par unless the fund finishes below its 75% barrier, in which case investors will be exposed to any losses.

“I may consider the notes, but I don’t like the notes,” said Carl Kunhardt, wealth adviser at Quest Capital Management.

Economic outlook

“I don’t like the notes because we’re not optimistic about the real estate market given the economic conditions and the job market. It’s not a sector we would want to make a bet on.”

But the adviser said he may be tempted to consider the deal because he likes the terms of the notes.

“Do I think the sector is going to be down a year from now? Yes.

“Do I think it’s going to be down more than 25%? I’m not sure I have that much conviction.”

What seemed more likely to Kunhardt was a call, probably early on.

“If it gets called, that’s fine. I don’t particularly like the underlying, so I don’t mind the call.

“That way, in just three months I can get just a little bit under 3%. That gives me some return over cash.

“I see it as a tactical move, a way to take advantage of the terms of the notes,” he said.

Tactical

But Kunhardt was not interested in incorporating the notes in his core portfolio.

“I wouldn’t consider real estate as part of my asset allocation.

“This note is based on an asset class that has volatility in it. Given the market conditions, it’s not conducive to a long-term position in a portfolio.”

Moreover, Kunhardt tends to avoid sectors in general.

“We don’t like the asset class and we don’t do sector bets. So, this would not add anything to our asset allocation.”

The notes however could provide a valuable alternative to cash.

Money market funds yield only 1%, he said. The 2.9% quarterly coupon if earned would be comparable to the yield on a short-term bond, he said.

“It’s a way to get a couple of percentage points of return assuming it gets called,” he said.

“If it’s not called, you take a chance. What if the ETF is down more than 25% after one year? That’s the risk.”

Credit, cost

Steven Foldes, vice-chairman of Evensky & Katz / Foldes Financial Wealth Management, was not keen on the volatility of the underlying, its valuation and the short maturity.

He first pointed to the cost of the trade.

“We don’t have a problem with Barclays. It’s a good credit,” he said.

“But the 1.25% fee is probably pretty high, especially if you get called before the end of the full year.

“Also, you have to take into account the 0.67% in dividend that you’re giving up.”

These issues however may have been overcome. More problematic was the underlying.

“What we find particularly unattractive is the fact that this area of the market tends to be pretty volatile,” he said.

Volatility was evident in the magnitude of the fund’s collapse during the Covid-19-induced market pullback and the pace and intensity of its recovery since.

“It dropped more than the S&P, which fell by 34% during that time.”

He was referring to the S&P 500 index sell-off between Feb. 19 and March 23.

The ETF peaked at $49.35 a share on Feb. 19 but plunged to $23.95 on March 18, a 51% drop.

The fund reached a new high last week at $54.71, posting a 128% increase since its March low. On Monday, it closed lower at $52.75.

For the year, the fund is now up 16%, which is nearly twice higher than the S&P 500 index gain so far.

Volatility

For Foldes, the rapid and intense appreciation of the underlying was concerning.

“Today, the share price is up 120% from its low. That’s a very robust rebound. Low interest rates and the rally we’ve had since March explain part of it. However, this note assumes a continued economic recovery and the market has already priced that in,” he said.

“This is a product tied to a very economically sensitive sector.”

He described what he perceived as the “danger” associated with the investment.

“If we don’t have the kinds of vaccines and therapeutics that are going to get us through in the short term, what we’re looking at is a high level of risk on the downside,” he said.

Rich valuations

“We know how much this ETF can fall compared to the S&P. We’re talking a 50% drop versus 34%,” he said.

“What makes the structure particularly scary is this 25% barrier. It’s not a buffer. It’s not a hard protection.”

But valuations were perhaps one of the most negative aspect for investors.

“We’re up more than double since March 18. It’s not a great bet at this point. You’re getting in at a high level, and the note does not offer any buffer. As a result, you really don’t have adequate protection on the downside,” he said.

Foldes brought up the tenor as another risk factor.

“Usually we prefer short-term notes. But not in this case.

“We’re still facing a lot of uncertainty as it relates to Covid, and we may not have enough time to let the future vaccines and treatments take our economy out of the danger zone.

“If things go wrong in the short-term, there is not enough time for the market to recover.”

This adviser said he would much rather see a two-year tenor.

“It would give me a lot more comfort. It could be 18 months, 24 months before we have a reliable vaccine.

“This note presents too many dangers, and, as a result, it’s not something we would invest our clients’ money in.”

Barclays is the agent.

The notes were set to price on Aug. 31 and will settle on Sept. 3.

The Cusip number is 06747QGB7.

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