Barclays’ buffered SuperTrack notes tied to Nasdaq-100 to complement long-only tech position

By Emma Trincal

New York, Nov. 2 – Barclays Bank plc’s 0% buffered SuperTrack notes due Nov. 30, 2021 tied to the Nasdaq-100 index may help advisers reduce risk induced by some of the clients’ overweight exposure to an extremely popular sector, advisers said.

The payout at maturity will be par plus 1.5 times any index gain, capped at par plus 13.5%, according to an FWP filing with the Securities and Exchange Commission.

If the index falls by up to 10%, the payout will be par.

Otherwise, investors will lose 1% for every 1% decline beyond 10%.

High-flyers

Carl Kunhardt, wealth adviser at Quest Capital Management, said that he liked the simplicity of the structure.

“This is easy. No bells and whistles. You can explain it in less than one minute. Keep it simple. I like that,” he said.

The Nasdaq-100 index is “not followed as much” as the S&P 500 index, he said. “But it’s an OK index.”

Many investors are familiar with the “QQQ,” he said, referring to the ticker symbol of the exchange-traded fund that tracks the index: the Nasdaq-100 Trust.

“The terms of the note are good: 1.5 times leverage, a 13% return a year, which is reasonable depending on your outlook and a 10% buffer,” he said.

Investors need to have a clear view on the technology-heavy benchmark, however.

“Apple, Microsoft, Amazon, Facebook, Tesla... these are all the top holdings and they’re mega-cap tech names. You’re taking on the highest flyers.

“If this market takes off, you’re going to blow right pass the 13%. You really are,” he said.

“Then the question becomes: should you really be capped at 13% for the 10% buffer?”

Hedging

The answer to this question is easy for very bullish investors, who would do away with the cap, he added.

But for most other investors, who expect at some point a reversal in the tech rally yet are reluctant to sell their winders, the note may offer a solution.

“I wouldn’t do a large part of it, but I would do it anyway,” he said.

“I would split whatever money I want to allocate to this sector into two equal parts. One half into the note itself. The other half into the QQQ directly.

This way, half of the allocation would benefit from the buffer. The other half would have unlimited upside.

“Of course, if I’m really bullish, I go long 100%.

“But this way I can hedge my bets.

“If the fund rallies, one chunk of my portfolio fully participates in the upside; the rest is capped at 13%. It’s not bad.

“If we have a doom and gloom scenario, if Congress goes after those tech guys, I get a little bit of protection.

“In case the return is very mild, if it’s up 4%, my note is up 6%.

“I see this note as a hedge.”

Popular underlying

Michael Kalscheur, financial adviser at Castle Wealth Advisors, had a similar approach to the note.

His first reaction was about the underlying.

“It’s fascinating to see the Nasdaq becoming more and more popular. Twenty-five years ago, the Dow was the index everybody watched. Over the years, the S&P supplanted the Dow. I don’t know anybody who benchmarks a portfolio against the Dow in the industry today.

“Recently the Nasdaq or the QQQ has decimated everything else because of its performance.”

The Nasdaq-100 has gained 22% year to date. After falling by a third during the late-winter bear market, the Nasdaq-100 is now up 65% from its low of March.

The S&P 500 index in comparison has only increased by 2.5% this year.

“The Nasdaq is much more volatile than the S&P. You have to be careful about taking a big position in this index,” he said.

Overly concentrated

Part of the volatility is due to the high concentration of the index in one sector – technology, which makes for 45% of the index, he noted.

In addition, the portfolio is concentrated around a limited number of highly volatile stocks. Three of them combined – Apple Inc., Microsoft Corp. and Amazon.com Inc. – represent nearly 35% of the index.

“It’s basically a tech fund even if Amazon in theory is not a tech stock. And you’re betting on the biggest of the big tech stocks, those that have driven the rally for months,” he said.

Assessing the risk

It’s precisely the strong run of those popular stocks that should make investors cautious.

“Apple is a fast-growing, profitable company. But it trades at a 33 P/E.

“You have to wonder how much more growth you’re going to see.”

On the other hand, the Nasdaq has already dropped 11% from its high of Sept. 2.

“I wouldn’t have touched this note with a 10-foot pole back in the beginning of September. But now that it has settled down, you have a better chance of a decent return,” he said.

For Kalscheur, the 13.5% cap was acceptable.

“Do I think the Nasdaq will be up 30% in the next 13 months? No. But it certainly could be up 20% or 30%.

“Still, a 13.5% return is fair.

“If it doesn’t move much, my 1.5x leverage is high enough to get me to 13.5%. In this case, I can beat the index.”

Kalscheur said he liked the buffer. “It gives you a little bit of protection and it’s not a barrier.”

The 10% protection however may not be sufficient if the technology-heavy index falls, he said.

“I don’t have data on the Nasdaq unlike the Dow and the S&P. But I would guess you probably have a 20%, maybe 30% chance of losing money.”

Mitigating the exposure

Given the risks on the upside but also to the downside, Kalscheur said he would use the notes a little bit differently.

“If I was going to position this, my goal would be to help some of my clients who are overweight the sector reduce the size of their positions a little bit,” he said.

He explained that some may have 5%, 6% or even 10% of their assets in stocks like Apple or Alphabet.

“It’s way too much. We cap out each of our positions at 4% and if it goes beyond that, we sell.

“But sometimes clients don’t want to sell. They’ve done so well with Apple; they don’t want to reduce their exposure. If we sell to rebalance the portfolio, they’re unhappy about it.”

Given the strong performance of these stocks, rebalancing needs to be constantly monitored as the caps per holding may increase rapidly.

“I can see myself using this note to convince some clients to reduce their tech position in Apple or Amazon. It’s a compromise. They sell a little bit of the stocks and buy the structured note. That way, they’re spreading out the risk.

“If the stocks are down, they outperform with the buffer.

“If the stocks have a mediocre performance, they outperform with the leverage.

“If big tech continues to shoot up, they’re still up 13%. It’s better than a stick in the eye,” he said.

Such “positioning” could help the adviser convince a reluctant client to take on some profits while remaining invested in the sector.

“This is a risk-reducing strategy, and that’s exactly what we’re looking for in a structured note,” he said.

There is an opportunity for “a decent return” and “a little bit of downside protection.”

Barclays is the agent.

The notes will settle on Nov. 4.

The Cusip number is 06747QLD7.

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