JPMorgan’s $1.46 million leveraged notes on indexes may outperform, but risk seen in worst-of

By Emma Trincal

New York, Dec. 1 – JPMorgan Chase Financial Co. LLC’s $1.46 million of 0% uncapped dual directional buffered return enhanced notes due Nov. 20, 2025 linked to the Nasdaq-100 index, the Russell 2000 index and the S&P 500 index may appeal to investors aiming at beating the market in both directions. But some expressed concerns about the worst-of risk.

If the worst performing index gains, the payout at maturity will be par plus 119% of that index’s return, according to a 424B2 filing with the Securities and Exchange Commission.

The payout will be par plus the absolute value of the worst performing index return if the worst performing index declines by no more than 20%.

Otherwise, investors will lose 1% for every 1% that the worst performing index declines beyond 20%.

Alpha generator

“I like this note,” a financial adviser said.

“If we go into a recession, you have the buffer plus an absolute return component. It may reflect a bit of a pessimistic view, or it may just be good risk control.”

The absence of a cap over a shorter-dated security was another positive, he said.

“The structure is pretty solid. It’s the power of the Russell. If you remove it, the terms will be nowhere near that. I think having the Russell can easily add a couple of percentage points,” he noted.

“If we do have a bear market and you’re down 20%, you beat the index by 40 percentage points. That’s a huge jump.”

Bearish tilt

For advisers seeking to outperform the market, the note offered better value on the downside.

“You’re almost hoping for a bear market,” he said.

“On the upside, it’s nice to have 1.2 times with no cap, but 1.2 times is not much if the market goes nowhere. If it’s up just a little bit, the excess return you may get will be limited.”

As an example, a 3% increase in the underlying would generate a 3.6% return. The same amount of decline would produce a slightly lower gain of 3%. Yet, investors would get six percentage points in excess of the benchmark.

“Your outperformance increases on the downside. A 19% drop is a 19% positive return. That’s stunning,” he said.

Even if the price falls below the buffer threshold, canceling the benefits of the absolute return, the note will continue to outperform, he said.

“Overall, it’s a good note because you can beat the market regardless of its direction,” he said.

Pure growth

“It seems like a good deal. When you have a short tenor with two times exposure, no cap plus a buffer with absolute return, that’s a strong payout,” a market participant said.

“But it’s a worst-of.”

Thanks to the so-called “Magnificent Seven,” the S&P 500 index has posted a strong performance this year, he said.

“But we don’t know what the future holds, especially with three different indices,” he said.

He said he saw other types of uncapped leveraged notes named “catapults” in the marketplace. Those offer uncapped enhanced return at the condition that the notes skip a one-time autocall and reach maturity.

“The catapults I’ve seen had an autocall and a longer duration. This one is a pure growth play. It’s a very different investment for a different type of thesis,” he said.

Disparities

Steven Foldes, wealth manager and founder of Evensky & Katz / Foldes Financial Wealth Management, objected to the worst-of payout.

“I don’t love the note because you have three underlying and there’s a huge disparity of returns between the three,” he said.

For the year, the S&P 500 index is up nearly 20% while the Russell 2000 has gained 5.2%.

Meanwhile the Nasdaq has jumped 36.6%.

Foldes was mostly concerned about having exposure to the index laggard if the market rally was to continue next year.

“The disparity of returns is huge. You wouldn’t want the exposure to the Russell this year. I would give up the 20% buffer to increase the leverage,” he said.

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes settled on Nov. 22.

The Cusip number is 48134B2T9.

The fee is 0.25%.

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