HSBC's buffered AMPS tied to SPDR S&P Metals & Mining ETF offer rare exposure, technical play

By Emma Trincal

New York, Oct. 25 - HSBC USA Inc.'s 0% buffered Accelerated Market Participation Securities due April 30, 2014 linked to the SPDR S&P Metals & Mining exchange-traded fund offer a rare exposure to the sector for structured notes investors seeking a good entry point and diversification from traditional large-cap equity benchmarks, said Andrew Valentine Pool, main trader at Regatta Research & Money Management.

The notes enable investors to express a bullish view on the global economy, he added.

"We like it," he said.

"We like it as a technical play and for diversification purposes.

The payout at maturity will be par plus double any fund gain, subject to a maximum return of 22% to 26% that will be set at pricing, according to an FWP filing with the Securities and Exchange Commission.

Investors will receive par if the fund declines by 10% or less and will lose 1% for every 1% that it declines beyond 10%.

Technical Analysis

"We think the XME has gotten beaten up, so the entry point makes sense," Pool said.

"XME" is the symbol under which the SPDR S&P Metals & Mining ETF is listed on the NYSE Arca.

"Even with the slowdown, we still think the note offers a good risk return," he said.

"You can play the sector directly and buy the ETF. We do both actually. But for a more conservative client, the 10% downside protection is attractive," he said.

The ETF peaked in early February at $56.77 before reaching its low for the year at $37.25 in July, a 34% decline. Since the July bottom, the ETF has rallied to $44.50, up nearly 20%, but it is still off 20% from its February top. The fund is down 13.5% for the year.

"We also do it also for diversification," continued Pool.

"You don't see that many metals and mining in structured notes.

"For certain clients, this enhanced note gives more diversification in an enhanced growth portfolio."

"Most of what they have is linked to the S&P 500, the Dow Jones or the Russell," he said.

Rare exposure

Data compiled by Prospect News indicated that the SPDR Metals & Mining ETF had not been very much in use so far this year.

Only two small deals, which priced in March, used this fund as their sole underlying, according to data compiled by Prospect News. They were:

• JPMorgan Chase & Co., which priced $3.31 million of 0% trigger phoenix autocallable optimization securities due March 7, 2013 linked to the SPDR Metals & Mining ETF. The trigger price was 70% of the initial share price. The contingent coupon of 13.9% was based on quarterly observation dates; and

• UBS AG, London Branch, which priced $2.83 million of 0% trigger autocallable optimization securities due March 31, 2017 linked to the SPDR S&P Metals & Mining ETF. The structure offered an 11.73% call premium on the upside and a 45% downside trigger price.

JPMorgan and Barclays have issued a few other small deals using the SPDR Metals & Mining ETF, but they combined this underlier with other funds or indexes, such as the Market Vectors Gold Miners ETF and the Russell 2000 index.

Economy bulls

Pool said that the notes offered investors who are upbeat about the economy a way to express their view.

"For the next year and a half, I am bullish on the global economy," he said.

"As much as there is a slowdown, we think the up-and-coming countries will be strong enough to continue to deliver growth. Our focus is on emerging markets and developing markets. Developed countries are a different story," he said.

Pool compared the metals mining stocks with the Market Vectors Gold Miners ETF, saying that they were rather distinct despite their common purpose of giving commodities exposure through stocks.

"Unlike gold, the metals represent more of an industrial play. It's more attuned to how well the world economy is doing," he said.

Issuers have priced 25 deals based on the Market Vectors gold miners ETF, so far this year, according to the data.

Pool said that he liked the 10% buffer, even if the downside risk remains due to the underlying volatility of the fund.

"But we like it because we're getting in at around $45.

"It's a bet on commodity price inflation. All the liquidity in the system induced by the Fed and the ECB bond purchases is going to be inflationary. Inflation in turn will push up commodity prices, which is a positive for commodities in general including metals," he said.

Narrow view

Other financial advisers are less enthusiastic.

"This underlying doesn't work for us," said Steve Doucette, financial adviser at Proctor Financial.

"I think metals is a little bit too specific for us. We prefer structures with a little broader exposure.

"It's not that we don't like commodities. We do. We think there's growth potential in commodities and emerging markets. We've been looking for commodities exposure. But we would look for something different, even like natural resources and in any case, something much broader."

Doucette also said that commodities-based notes can provide diversification.

"The S&P is all large caps, and we could benefit from more diversification. Since we haven't done commodities or emerging markets, we would be looking into that. One thing we certainly stay away from are those very sector-specific themes like this one. We also don't like proprietary indices that can drive you crazy just by trying to study it. We have other things to consider before focusing on metals and mining," he said.

The notes, with a 22% to 26% cap over 18 months offer an actual annualized cap of approximately 14.5% to 17.5%. Since the upside is twice the fund's performance, a 7% to 9% positive return a year approximately would be enough to maximize the upside, he said. On the downside, investors are exposed to losses only past the 10% buffer.

"This is not a note for someone who is particularly bullish on the economy, otherwise why the cap? It's more for someone who thinks the market will be chopping around," he said.

Still, Doucette said that the terms of the notes were not bad for someone who has a sideways view of the market.

"For someone looking for a little bit of protection with some leveraged upside, someone who doesn't see a whole lot happening but who still thinks the economy will be picking up, that may not be bad.

"I have a similar outlook. I'm not very bullish or very bearish on the economy."

"The terms of the notes or the macroeconomic rationale are not the issue here. I'm just not interested in this underlying. That's what it comes down to," he said.

The notes will settle on Tuesday.

HSBC Securities (USA) Inc. is the agent.

The Cusip number is 4042K15Q2.

The XME seeks to replicate the total return of the S&P Metals & Mining Select Industry index, which measures the performance of the Metals & Mining segment of the U.S. equity market.

© 2015 Prospect News.
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