JPMorgan’s $500,000 digital barrier notes on indexes to outperform but within limited range

By Emma Trincal

New York, Sept. 2 – JPMorgan Chase Financial Co. LLC’s $500,000 of 0% digital barrier notes due Oct. 5, 2022 linked to the least performing of the Dow Jones industrial average, the Nasdaq-100 index and the Russell 2000 index could significantly outperform the market but only within a narrow window, advisers said.

Such positive outcome may also be harder to achieve if volatility resurfaces, a strong possibility in a richly valued bull market.

If the least performing index finishes at or above 82.9% of its initial level, the payout at maturity will be par plus the digital upside return of 10%, according to a 424B2 filing with the Securities and Exchange Commission.

Otherwise, investors will be fully exposed to the decline of the least performing index from its initial level.

Rangebound only

Steve Doucette, financial adviser at Proctor Financial, said the notes would not sustain a bear market. But in a sideways market, the payoff could be attractive.

“Getting a 10% return over 14 months if the market drops but remains above the barrier is good. But it also comes with the price: you don’t have a lot of protection,” he said.

“You really have to be confident you’re not going to go up more than 10% or down more than 17%.

“But it’s a tight range really and you still have a big downside risk.

“If one of those three is down 40%, you’ll be down 40%.”

For Doucette, a 17% contingent protection is not sufficient when the market is as toppish as it is today.

“Getting a 10% return over 14 months is not a bad thing. But again, you have to look at the downside. If you’re down 17%, you lose it. That’s a small barrier,” he said.

The cap of approximately 8% per year could be the so-called upside risk if stock prices keep on rising.

“If this market continues to run, you could be far behind with your 10%.”

Bear scenario

But for the most part, the risk was on the downside, he said.

“The definition of a bear market is a 20% drop. That’s very close to the barrier level. And that’s the minimum for a bear market. Bear markets on average have much bigger drawdowns,” he said.

The average loss during a bear market is 33.18%, according to an Invesco study about the S&P 500 index performance from October 1957 to December 2019.

Another risk factor is the exposure to the worst-performing of three indexes.

“The Dow might be more stable, but the Russell could push that barrier down and the Nasdaq too. Both are volatile.

“We all know the impact of volatility on the market, especially when you hit a new record high several days a week,” he said.

Rangebound or else

Investors in the notes would have to envision a rangebound market, he said.

“It doesn’t make sense to invest in this note is you expect big moves up or down.

“We keep making new highs. We just hit a new record high today. There’s not much of a protection in there.

“We don’t know what the market is going to do in the next 14 months... if it’s going to fall or run further. You might outperform or you might not. It’s hard to know,” he said.

Given current valuations and the risk on the downside, Doucette said he would not consider the notes.

“It’s hard to get excited about this one,” he said.

Volatility

Matt Medeiros, president and chief executive of the Institute for Wealth Management, expressed concerns about a never-ending bull market. He saw risks both on the upside and the downside.

“It doesn’t appeal to me very much at all,” he said.

“I think there’s a fair amount of volatility in the market at this time. We haven’t seen much of a pullback in many, many months. September is usually a bad month for investing.

“I can easily see a 10% pullback in any of these indices,” he said.

But the perspective of a limited upside was just as problematic.

Low cap

“Conversely, if these indices appreciate, you’re not going to participate in the upside beyond 10%,” he said.

“I’m not a fan of taking equity risk and get capped on the upside.

“Give me a three year with a 50% cap. I’ll think about it.”

Investors can outperform in a range comprised between 82.9% of the initial level and plus 10%.

“What it means is a low cap and a thin barrier. I don’t like either side of the equation,” he said.

“Sure, you can outperform in between. But that range between the barrier and the cap is just too narrow.”

In order to better control risk, Medeiros said he would need to see a deeper barrier and no cap.

“If it means extending the duration of the notes, so be it.

“In fact, it would work better for me. I’m not a short-term investor. I’d much rather have a longer maturity.

The agent is J.P. Morgan Securities LLC.

The notes will settle on Friday.

The Cusip is 48132WHG7.

The fee is 0.6%.

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