JPMorgan’s $1.93 million worst-of digital on Russell, S&P are designed for cautious investors

By Emma Trincal

New York, Feb. 20 – JPMorgan Chase Financial Co. LLC’s $1.93 million of 0% uncapped contingent buffered return enhanced notes due Jan. 31, 2023 linked to the lesser performing of the S&P 500 index and the Russell 2000 index show a very defensive profile, which should limit the risk of extreme market drawdowns, sources said.

If each index finishes at or above its 118% upside leverage threshold, the payout at maturity will be par plus 1.2 times the gain of the worse performing index over the 18% contingent minimum return, according to a 424B2 filing with the Securities and Exchange Commission.

If either index falls by up to 40%, the payout will be par plus 18%.

Otherwise, investors will lose 1% for each 1% decline of the worse performing index.

Dividends

While investors may “lose” up to 10% over the term in unpaid dividends, the leverage helps offset some of that depending on the worst-of performance, said a buysider.

“This is something that can out-earn the dividend,” he said.

The S&P 500 index has the highest dividend yield of the two indexes at nearly 2%. As a result, investors in the notes see their performance lagging the total return of the index by approximately 10% over the five-year period.

“For any return over 50%, you’ll do better with the structure,” he said.

Strong barrier

The depth of the barrier and the downside payout with a digital were attractive features, especially in a volatile market.

“The downside protection is pretty good. It’s certainly better than a buffer. You have 0% return on a buffer. Here you’re getting 18% over a 40-point range below par,” he said.

The notes are not designed for bullish investors however.

“It may work for someone who expects a not very robust market. It’s a very defensive note,” he said.

“In fact, come to think of it, the downside is probably overkill.”

Bond substitute

He offered an illustration based on a five-year rolling period observed every month since 1979 up to last month for both indexes – the S&P 500 and the Russell 2000.

The worst five-year period for the S&P 500 was the five years ended in February 2009 with a 26.80% negative return. For the Russell, the performance was a 33.6% loss over the five-year timeframe.

“You don’t really need a 40% protection,” he said.

The notes had such a conservative structure that they could be used by income-seekers.

“Your risk is very limited. This is a pretty low beta equity-kind of play that’s probably never going to create a loss according to the historical data.

“You’re getting a minimum of 3.37% a year.

“You can beat a lot of bond funds or balance funds with that.”

Credit, correlation

Steven Foldes, vice-chairman of Evensky & Katz / Foldes Financial Wealth Management, said there were “things he liked” about the notes and others he did not.

“The things that we like are first, JPMorgan’s credit,” he said.

“We also like the digital coupon note that gives a minimum guaranteed return.

“Although we don’t love worst-of, we don’t mind having two underlying which are closely correlated. That’s not so bad and we understand that you need the worst-of for better results as it relates to the note itself.”

Tenor, barrier

Among the “things that we don’t like,” the five-year term is “a non-starter for us,” he said.

“You don’t need a 40% barrier on a five year. It would be very unlikely to have any of those two indices go down more than 40% in five years.

“You’re paying a fair amount for that protection, which you don’t need. Even if they’re giving you 18% and not just your principal back, it’s still unnecessary to have such a deep barrier down to 40%.”

If he had to “refashion” the structure, Foldes said he would rather increase the leverage factor or look at a digital return “significantly higher” than 18%.

More bullish

Foldes said he recently purchased a 13-month note that is a better fit for his portfolio.

“It was on emerging markets, which we know is volatile. But it was not a worst-of,” he said.

The note had no downside protection. But it will pay a digital return of 11% per annum and is uncapped.

“We don’t buy five-year notes. But assuming that we did, we certainly would not want the downside protection. Instead we would need more potential for gains.”

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The Cusip is 48129HC21.

The fee is 0.56952%.

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