JPMorgan’s $4.44 million leveraged notes on EAFE offer buffer over short tenor

By Emma Trincal

New York, Oct. 29 – JPMorgan Chase Financial Co. LLC’s $4.44 million of 0% capped buffered enhanced participation equity notes due Oct. 13, 2023 linked to the MSCI EAFE index provide buffered protection with leverage over a two-year term, which caught advisers’ attention as buffers tend to be pricey on short durations.

If the final index level is greater than the initial level, the payout at maturity will be par plus 1.4 times the index return, subject to a maximum settlement amount of par plus 22.33%, according to a 424B2 filing with the Securities and Exchange Commission.

If the final index level is flat or greater than or equal to the 87.5% buffer level, investors will receive par.

If the index falls by more than 12.5%, investors will lose 1.1429% for each 1% decline beyond the buffer.

Solid pricing

“Any time you have two year or less with a buffer, it means solid pricing,” a wealth manager said.

“I always like the geared buffer because you can get more protection. You get more bang for your buck.”

The leverage on the upside was also attractive.

“1.4 times is solid too. It’s not two- or three-times upside leverage, but you do have the downside protection.

“I like this kind of tradeoff. Investors are more skittish. This market can be prone to extreme cases of volatility.

“That’s why I’d rather have a little bit more downside protection and less leverage on the upside, which is how this note is structured.”

Cap

A second financial adviser agreed.

“I do like the buffer. Geared buffers have never been an issue for me. You’d have to be down so much before really feeling the pain of the gearing,” he said.

The cap was also acceptable.

“We hate to cap our gains. But that’s a tradeoff. In this environment, you want to cut some of your losses. You may not outperform on the upside, but you should be able to outperform on the downside.

“Besides it’s not a terrible cap.”

The two-year cap is the equivalent of a 10.6% annualized compounded return.

Still lagging

This adviser also liked the underlying.

The MSCI EAFE index provides exposure to non-U.S. developed markets in Europe, Australia, Asia and the Far East.

“If you believe in the reversion of the mean, the EAFE is probably a good play. They’ve rallied a lot, but they’re still underperforming the U.S,” he said.

Since the short-lived bear market induced by the pandemic in March 2020, the MSCI EAFE index has been rising 76%. The S&P 500 index in the meantime jumped 110%.

For the year to date, the EAFE index is up 9.6% while the S&P 500 has gained 22.6%.

Value play

This adviser said the EAFE index remains a value-type of investment.

“When you look at European stocks, or no-U.S. stocks, you still find P/Es around 10 to 15, instead of 20 to 30 in the U.S.,” he said.

One risk was the role played by short-term investors, he noted.

“There’s been this rotation thing for a while now. Traders keep on going back and forth from value to tech stocks and the other way around. They make it almost impossible to have a long-term view on value or growth,” he said.

“When the pandemic led to lockdowns, people bought tech stocks. With the recovery they moved back to cyclical and value. This constant rotation depends on Covid to a large extent. It’s a factor of uncertainty, which is why you want to have a buffer,” he said.

Dangerous gearing

A market participant held a different view, criticizing both the terms of the notes and the underlying asset class.

“One of the main reasons I want to do structured notes is because of the protection,” he said.

“So, here we have a buffer. But I don’t like these geared ones that multiply the downside after you breach the threshold. It increases your downside risk.”

Instead, this market participant would rather replicate the trade with a call spread, which would not involve levering the downside.

“I understand it’s still a buffer. But if the bottom fell out, the gearing would compound your losses significantly,” he said.

Euro headwinds

This market participant said he was not bullish on the EAFE index, in part due to its strong representation of the European equity market, which constitutes more than 61% of the portfolio.

“We’re heading in the direction of higher energy costs, rising inflation, along with muted growth and potentially, the risk of more Covid cases,” he said.

He added that political risks should not be overlooked when it comes to Europe.

“There’s a reason why most people are putting their money in the U.S. market. European markets have a little bit more headwinds. The European Union has its problems. Member states must reach a consensus for important decisions. You try to please everybody. But those countries’ views don’t align with each other,” he said.

The bullet notes are designed for investors willing to hold their investment until maturity, according to the prospectus, which points to the “lack of liquidity” associated with the securities as all filing documents do.

“It’s not autocallable It’s not liquid. I don’t think you’re getting paid enough illiquidity premium for it, especially when your upside is limited,” he said.

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes will settle on Monday.

The Cusip number is 48132YEX9.

The fee is 0%.

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