JPMorgan’s autocall buffered leveraged notes on Nasdaq may cap gains too soon, advisers say

By Emma Trincal

New York, Aug. 6 – JPMorgan Chase Financial Co. LLC’s 0% autocallable buffered return enhanced notes due March 3, 2022 linked to the Nasdaq-100 index provide leveraged uncapped exposure with a buffer over a short tenor, features that are often sought after by note buyers. But an automatic call after one year could change the outcome and reduce the potential return, advisers said.

The notes will be called at par plus at least 7% if the index closes at or above its initial level on Aug. 27, 2021, according to an FWP filing with the Securities and Exchange Commission.

The payout at maturity will be par plus 2 times any index gain.

Investors will receive par if the index falls by up to 10% and will lose 1% for every 1% decline beyond 10%.

Missing out

Matt Medeiros, president and chief executive officer at the Institute for Wealth Management, said the risk on the notes is on the upside.

“The Nasdaq is already up close to 24% this year. That’s not even a full year,” he said.

“If you get called after one year, you get only 7%. You’re leaving money on the table. Take this year’s return for instance, which is only seven months really, and that’s an opportunity cost of 17%.”

Very few people expected the index to go up that much, he noted.

“It’s unprecedented.”

But even if the Nasdaq’s performance slows down over the next year, it is unlikely to be limited to the 7% call premium, he said.

Moderately bullish

“When I look at my equity positions, I expect to outperform. If I’m’ optimistic, I don’t want to have a cap.”

In the absence of a call event, the notes will provide double the index return with no cap.

But such scenario is unlikely.

“I’m kind of assuming you’re going to get called in one year,” he said.

The structure however could meet the needs of more conservative investors.

“If you want exposure to the asset class but don’t expect very high returns, if you want to play it safe, that’s one way to look at it,” he said.

The protective aspect of the structure is the call itself, which removes all risk exposure as well as the buffer at maturity, which reduces the amount of losses, he said.

“But if you are optimistic about the Nasdaq over the next 18 months, you probably wouldn’t buy this,” he said.

Call implications

The structure is innovative, a financial adviser said. But the automatic call observed two-thirds of the length of the investment period reduces the chances of enjoying the benefits offered at maturity.

“The leverage and buffer components are nice, but you are restricted in time,” this financial adviser said.

“You only have six months to make a decent return.

“It’s only when the notes mature that you get the leverage and the buffer. That means, no call. And no call means that the index, on the call date was down. It was down after one year. So now you have to be up quite a lot at the end to make the leverage work for you and take advantage of the no-cap.”

Climbing back up

Benefiting from the leverage is more likely if the index is only slightly and not strongly negative on the call date. Even in this case, the Nasdaq only has six months of growth to achieve good enhanced performance.

“And what if you’re down 10% or 20% after one year? Now you only have six months to make it back.

“The market has gone up like crazy, and we know the economy is going to shrink down.

“Where will the market be in 18 months is anybody’s guess.”

Term, timing

What makes the decision to invest in this product difficult is the short time between the call review date and the maturity, this adviser said.

“This is kind of a neat concept. But you only have a six-month window to make things happen,” he noted.

“If it was a little bit longer, the leverage would make sense.

“You might outperform on the upside if it’s not called. If it is called, chances are you won’t.

“But then it’s the Nasdaq. What are the odds that you won’t get called?

“The only way you may outperform is on the downside with this 10% buffer.”

Timing and current market valuations should also be considered, he noted.

“If this was in March, I might jump on it. But now that we’ve run back up to market peaks, I’d be a little bit more cautious.

“You’re just locking yourself up for something that might never pay up,” he said.

The notes will be guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes will price on Aug. 26.

The Cusip number is 48132M3Q2.

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