HSBC’s three-year market notes tied to MSCI ACWI ETF offer buffered exposure to global markets

By Emma Trincal

New York, Nov. 3 – HSBC USA Inc.’s 0% buffered market participation securities due Nov. 16, 2018 linked to the iShares MSCI ACWI exchange-traded fund give conservative investors access to world equity markets with substantial downside protection and moderately bullish returns, sources said.

The payout at maturity will be par plus any index gain, up to a maximum return that is expected to be at least 20% and will be set at pricing, according to an FWP filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 20% and will lose 1% for every 1% decline beyond 20%.

Defensive

The fund tracks the performance of the MSCI ACWI index, a global benchmark for large- and mid-capitalization developed and emerging market equities.

Donald McCoy, financial adviser at Planners Financial Services, said the underlying fund may appeal to the cautious type of investor.

“International stocks in emerging markets and developed countries have experienced significant drops recently, between mid-August and the end of September. It made people gun-shy. Maybe some investors want to have the exposure but also the protection, so they’re willing to trade off the upside to get the buffer. Twenty percent for a buffer over a three-year period is a significant amount,” he said.

Reasonable trade-off

“In exchange, your profit is limited to 7% a year. Whether the trade-off works for you or not depends on your outlook, obviously.

“To me, it seems like a very reasonable trade-off because I don’t expect much more than single-digit returns over the next three years.

“If you told me that I was going to get 7% a year over the next three years, I would tell you, ‘Good. I’ll take that and I’ll be happy.’”

McCoy said that just because a note is capped does not mean it has no appeal. Some investors feel comfortable with the limitation.

“The cap becomes a problem if you expect more in return. If you don’t, it doesn’t matter. To expect double-digit returns over the next couple of years would be stretching it given where valuations are.

“If you’re from my perspective and see limited upside for equities, getting the 20% buffer makes this deal work to your advantage.

“You’re getting this buffer for very little.”

Crowded index

A market participant questioned the rationale of getting exposure to such a broad index. The MSCI ACWI index includes 23 developed market and 23 emerging market component country indexes.

“You can’t be wrong! There’s plenty of diversification in that. I’m being cynical. ... I think there is a risk of over diversification people don’t always realize,” this market participant said.

“The way you diversify is not by putting all eggs in one basket.

“I’d rather diversify by asset classes or sub-asset classes, for instance 10% in commodities with some allocation to gold in it, 30% in U.S. equities, etc.

“If you put all the world exchanges in the portfolio, what kind of movement are you getting?

“It’s like the Lincoln Tunnel at 5 o’clock. Everyone wants to get in at the same time.”

International exposure

McCoy said that for some investors, a global equity allocation offers a helpful compromise.

“Half of the fund is in the U.S., and that’s not unusual. You typically have a 50/50 split between the U.S. and international, so it’s expected. And you’re going to have a super high correlation with international stocks. It’s the issue you have with global funds mixing U.S. and international equity. You don’t get enough international to complement your domestic exposure,” McCoy said.

And yet, global funds and indexes serve a purpose, he said.

“Some people may not be comfortable with pure international exposure. The only way they’re going to get it is if it’s presented to them in a global structure. They want the U.S. allocation too.

“If you’re dealing with smaller accounts who do not have a lot of positions, you can cover a lot of bases with one sizeable investment in a global fund.”

HSBC Securities (USA) Inc. is the agent.

The notes will price Nov. 10 and settle Nov. 16.

The Cusip number is 40433UCA2.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.