Barclays’ $1 million notes on Russell 2000, United States USO requires macro view, deep analysis

By Emma Trincal

New York, Feb. 8 – Barclays Bank plc’s $1 million of 0% buffered SuperTrack notes due Feb. 2, 2026 linked to the United States USO Fund LP and the Russell 2000 index offer strong structural benefits such as uncapped leveraged return with downside buffer over a short tenor. But the choice of the two underlying assets makes the investment decision more difficult to make, advisers said.

If the least-performing underlier’s return is positive, the payout at maturity will be par plus 2.15 times the return of that underlier, according to a 424B2 filing with the Securities and Exchange Commission.

If the worst performer declines by 15% or less, the payout will be par. Otherwise, investors will lose 1% for each 1% that the worst performer declines beyond 15%.

Intriguing

Andrew Valentine Pool, main trader at Regatta Research & Money Management, looked at the notes from a macroeconomic perspective.

“This is very interesting. At first glance you would assume that oil is the worst-performing one, but it really depends on the economy,” he said.

The United States USO Fund tracks the price of light sweet crude oil futures contracts, which are priced off the West Texas Intermediate (WTI) benchmark.

WTI futures settled at $76.46 a barrel on Thursday.

“It’s not that cheap. But it’s not [$]40 either. Oil can go up a lot more. If it goes back up to 100, that would be a 31.5% gain,” he said.

Double edge

Pool explained why he made a reference to the $100 price target.

“It’s a level that tends to trigger the market. That’s when consumers begin to get scared. When oil gets that high, it starts to hurt the economy,” he said.

If this happened, the economy would slow down and the Russell 2000 index would start to falter, possibly becoming the worst performing asset, he added.

“It really comes down to timing.

“If the economy starts to grow and the Russell takes off, where is oil at that time? You have a two-year window.

And if in two years oil goes up too much, the Russell may go down,” he said.

Landing right

The risk of a recession and its magnitude, if any, helped explain the relationship between the two assets.

“If the economy is doing well and oil is up without going through the roof, you could have a very nice return in two years.

“But if we have a hard landing scenario, all bets are off,” he said.

However, Pool said he did not anticipate a severe recession.

“If we have a soft landing, which I expect, the outcome would be positive.

“In the event of a stable growth for both of these underliers, you would get more than double the return of the worst-of with no cap.

“You just need to have a strong view on the economy.

“Not an easy bet, but definitely an interesting one,” Pool said.

In transition

A financial adviser said he was uncomfortable with the ETF, especially in a worst-of format.

“So here we are. I often criticize those notes for their cap. And then when they finally get rid of the cap, they come up with this weird combination of indices,” said Steve Doucette, financial adviser at Proctor Financial.

Investors in the notes had to be bullish on oil.

“Your decision to buy the notes is about how much you want to invest in oil because USO is the worst-of,” he said.

He pointed to the volatility of the commodity.

“Oil can come down and then back up, but how quickly it’s going to move and how much is anyone’s guess, especially two years out,” he said.

The implied volatility of the United States USO Fund LP is 35%.

Doucette said that the future of the oil industry is uncertain.

“The transition toward net-zero emissions is a real challenge for fossil fuels. With new sources of energy, we may not even need oil anymore.

“Sure, we’re unlikely to see that in two years. But it could still have an impact because of those renewables competing with oil,” he said.

Volatility, unpredictability

Other factors such as inflation could also impact oil prices, he added.

“If you’re bullish on the economy, both oil and small-cap would be up, and you’d get 2x leverage plus the no cap. That’s a sweet spot,” he said.

If oil prices begin to jump due to their volatility, investors may lose the benefit of this rally, getting the exposure to the lesser-performing asset, he noted.

“That’s the problem with the worst-of,” he said.

“But how is this going to play out? It’s hard to tell.”

Another concern about having exposure to oil through the United States USO was the complexity of all the different factors affecting the price of this commodity.

“In theory, oil prices depend on supply and demand. But there are so many other things going on.

“I can’t make a prediction on future oil prices. I can’t even attempt to guess. You could very well end up with a black swan.

“This note would never be for consideration,” he said.

Barclays is the agent.

The notes settled on Feb. 2.

The Cusip number is 06745PQ20.

The fee is 0.4%.

© 2015 Prospect News.
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