Advisers debate the buffering of Barclays’ SuperTrack notes linked to S&P, Dow

By Emma Trincal

New York, Jan. 20 – Barclays Bank plc’s 0% buffered SuperTrack notes due Jan. 25, 2024 linked to the lesser performing of the S&P 500 index and the Dow Jones industrial average provide a buffer over a short tenor along with leveraged capped upside exposure. While the buffer always brings value to a deal, according to an adviser, its size may not be sufficient for a short-dated note, another one said.

If the lesser-performing index’s return is positive, the payout at maturity will be par plus 1.5 times the lesser-performing index’s return subject to a maximum return of par plus of 22%, according to an FWP filing with the Securities and Exchange Commission.

If the lesser-performing index declines by 10% or less, the payout will be par. Investors will lose 1% for each 1% that the lesser-performing index declines beyond 10%.

Beating the market

“It’s a simple, very straightforward note,” said Steve Doucette, financial adviser at Proctor Financial.

The structure met this adviser’s main buying criteria.

“With the leverage and the buffer, you can outperform in either direction,” he said.

The tenor was short.

“The duration is tough to call. But you still have a strong probability of outperforming,” he said.

Lower expectations

Doucette said he was comfortable with the 22% cap, which provides a maximum return of 10.5% a year on a compounded basis.

Given current market valuations, the cap provided a “reasonable” return, he said.

“We had three consecutive years of double-digit returns. I don’t think you can keep pace with that forever. Most market strategists on the Street have lowered their expectations for the next year or so,” he said.

The S&P 500 index rose 28.7% last year, preceded by 18.4% in 2020.

The Dow returned 18.73% in 2021 and 7.25% in 2020.

Over the past five years, the S&P500 index has doubled, and the Dow has gained 78%.

“Let’s say the market is up 7% a year over the next couple of years and you get 10% a year with the note, no one is going to complain about that,” he said.

“If on the other hand, the market is not up, you get a 10% protection on the downside.”

Buffer vs. barrier

A severe market decline was always possible, but Doucette downplayed the risk for large-cap stocks.

“There is less chance of a bear market with large-cap. When the market tanks, large-cap stocks go down but not as much as the other asset classes. Historically, they drop less than small-cap, less than mid-cap and less than emerging markets or international stocks,” he said.

Even if the market dropped 20% over the period, investors in the notes would outperform long positions as they would only lose 10% of their investment, he said.

“That’s why I’m a big fan of buffers,” he said.

“There is this debate among investors: do you want a 10% buffer or a deep barrier? I can understand that a 30% or 40% barrier is not a bad thing. But I like the buffer better, even if it’s only 10% because the buffer gives you a guarantee that you don’t have with a contingent protection.

“If you bust a barrier, you lose a lot. At least with the buffer, you still keep some.”

Large-cap

The worst-of payout allowed for the pricing of a “competitive” cap as well as a buffer over a short duration.

“It’s always better to do it on one index. But the terms are going to be much better with two. At least they’re both large-cap so your correlation is pretty tight,” he said.

The coefficient of correlation between the Dow and the S&P 500 index is 0.938. A coefficient of 1 indicates a perfect correlation.

Overall, Doucette said he liked the deal.

“It’s a neat one,” he said.

No cap, please

Matt Medeiros, president and chief executive of the Institute for Wealth Management, had a different view on the notes.

“First, I don’t like the cap. It’s not even about the size of the cap. I just don’t like having a cap on equity,” he said.

“If I’m going to have leveraged exposure to large-cap, I’ll make sure not to limit my upside. I would go out longer term rather than short-term just to be able to get rid of the cap.”

Extending the duration was not just a way to enhance the terms, he said. It was also necessary to mitigate risk.

“I’m not comfortable with a two-year holding period at this point. That’s my second issue with this note.

“Two years is not a good timeframe as we’re going into a more volatile market with the Fed’s tightening and an Election year at maturity.”

Go long only

Investors seeking short-term exposure would be better off long the underlying indexes, he said.

“You can buy the ETFs on the S&P and the Dow. You can even buy the leveraged ETFs if you want to.

“That way, you can eliminate the worst-of component, which to me is a plus. I never liked worst-of.

“And even if you don’t have the protection on the downside, at least you have the flexibility of getting out whenever you’d like.

“I like buffered notes in general. But 10% on a two year is just not enough.”

Barclays is the agent.

The notes will price on Friday and settle on Jan. 26.

The Cusip number is 06748X3H2.

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