Morgan Stanley’s $250,000 Trigger PLUS on gold, silver ETFs show ‘fair’ tradeoff, adviser says

New York, Jan. 4 – Morgan Stanley Finance LLC’s $250,000 of 0% Trigger Performance Leveraged Upside Securities due Dec. 20, 2024 linked to the SPDR Gold Trust and the iShares Silver Trust provided reasonable terms due to the high correlation between the two underlying assets, a financial adviser said.

If the return of the worst performing asset is positive, the payout at maturity will be par plus 120% of the return of the worst performing asset, according to a 424B2 filing with the Securities and Exchange Commission. Investors will receive par if the return of the worst performing asset is negative but ends at or above the 70% trigger and will lose 1% for every 1% decline if it ends below the trigger level.

Precious metals

Donald McCoy, Financial adviser at Planners Financial Services, focused on the moderate dispersion risk between the two underlying assets.

“It’s a worst-of on two commodities. But it’s not gold versus cotton. It’s gold and silver, two precious metals. You’re unlikely to see a huge divergence, one going up while the other is going down. They may move in different ranges but they’re fairly close,” he said.

The three-year coefficient of correlation between the SPDR Gold Trust and the iShares Silver Trust is 0.837.

A coefficient of 1 signals a perfect correlation.

“There’s not much dispersion risk, here,” he said.

Tradeoff

“You’re getting the lower of the two, but you’re also getting the 20% kicker.”

Exposure to two commodities funds also eliminated the concern investors may have about “giving up” dividends, he noted.

The SPDR Gold Trust tracks the performance of the price of gold bullion while the iShares Silver Trust seeks to reflect the return of silver.

“It seems like a decent way to get exposure to precious metals. You lose some return in the exposure to the worst-of. But you get the 20% boost to offset some of that underperformance, which may not be significant given the tight relationship between the two assets. In addition, you have that 30% downside protection.

“Based on the close correlation, I think you’re not giving up too much on the upside,” he said.

Downside protection

The 70% barrier was necessary with assets as volatile as the two precious metal funds, he said.

“The note gives you a fair amount of protection. But you still should be cognizant about the downside risk with precious metals,” he said.

“The fact that it’s a three-year helps. If it was a one-year, I would be more worried, especially with silver, which tends to be more volatile.”

The implied volatility of the Silver Trust is 26.68% versus 15.22% for the SPDR Gold Trust.

“Overall, it looks like a reasonable tradeoff. You’re not losing on the dividends. You get the worst-of exposure. But on the other hand, your return is leveraged, uncapped and they give you some decent protection on the downside. It’s fair,” he said.

Reversal play

Tom Balcom, founder of 1650 Wealth Management, said the notes could be used in a defensive portfolio.

“I see it as a hedge for someone with equity exposure. In the past three years, those ETFs have had returns ranging from 35% to 45% over the period,” he said.

Meanwhile U.S. stocks have posted their best three-year returns in 24 years despite the steep bear market at the onset of the pandemic, according to a Morningstar report.

“Gold and silver have considerably underperformed the U.S. equity market,” Balcom said.

“I can see this note as a potential mean reversion trade. Gold has done so poorly last year. It might outperform in 2022.”

The SPDR Gold Trust was down more than 6% in 2021 while the S&P 500 index closed out the year with a 26.9% gain.

Diversification

Balcom pointed to several potential benefits the notes may offer to investors.

“You could buy it as an inflation hedge. You could also use it as a reversal play. I think it’s more of a tool to add diversification to the portfolio. This is the main reason for the trade in my opinion,” he said.

The traditional use of gold as a hedge against inflation “did not work so well” last year, he said.

“People always say: gold can protect a portfolio against rising prices. But we had high inflation numbers last year and gold did so poorly. Why? The thinking is that people are now using cryptocurrency as an inflation hedge. That may be an explanation. I’m not sure. It certainly worked out better last year for crypto than for gold.”

Balcom said it was impossible to predict which of the two ETFs would be the lesser performing underlying.

“I have no idea. But the terms of the product are pretty attractive.

“You have 1.2x on the upside. Having leverage is always good, especially uncapped leverage over three years.

“On the downside, the likelihood of being down 30% over that timeframe is probably slim.

“It’s a good diversifier. It certainly has a place in a portfolio,” he said.

The notes are guaranteed by Morgan Stanley.

Morgan Stanley & Co. LLC is the agent.

The notes settled on Dec. 22.

The Cusip number is 61773HTR0.

The fee is 2.5%.

© 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.