JPMorgan’s uncapped buffered return enhanced notes on Russell, S&P offer core bullish play

By Emma Trincal

New York, April 23 – JPMorgan Chase Financial Co. LLC’s 0% uncapped buffered return enhanced notes due April 28, 2023 linked to the lesser performing of the Russell 2000 index and the S&P 500 index provide investors with a plain-vanilla and defensive strategy on U.S. markets, advisers said.

If each index finishes at or above its initial level, the payout at maturity will be par plus at least 1.14 times any gain of the lesser-performing index with the exact participation rate to be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the lesser-performing index declines by up to 22.5%.

Otherwise, investors will lose 1% for each 1% decline of the lesser-performing index beyond the 22.5% buffer.

A good one

“On the surface I do not like worst-of. It feels like gambling. Despite that, it’s an attractive note, fairly diversified. You’re juggling between large-cap and small-cap, which is good,” said Carl Kunhardt, wealth adviser at Quest Capital Management.

What Kunhardt does not like with worst-of is not knowing what his market exposure will be at maturity. In this case, he was confident that the note will be directly linked to the performance of the Russell 2000 index and not to that of the S&P 500.

“Really what you’re betting on is the Russell,” citing the higher volatility of the small-cap benchmark.

“While we don’t really have a five-year outlook, we’re seeing a market that we believe is going to continue to do well. Will we have a correction? Sure. But we’re positive for small-caps because we’re positive on the U.S. economy for the next five years.”

Terms

With a bullish outlook on both indexes, Kunhardt said he felt more comfortable investing in this note given its structure.

“I would do the note primarily because the terms are attractive,” he said.

“Leverage is not a lot. But you get some.

“No cap is a good thing for me.

“The fact that I have a real buffer is great.

“I have unrestricted upside, a safety net and a major index I’m positive on.

“So, despite the worst-of, I like it.”

Core product

Matt Rosenberg, sales trader at Halo Investing, said the product may appeal to a large number of investors.

“S&P and Russell. That is about as core as you can get,” he said.

“Everyone is exposed to the U.S. whether they’re bullish or neutral. This note can complement most everyone’s portfolio.”

The structure was “plain-vanilla,” and the two underlying offered the advantage of a high correlation, which is a risk-reducing factor with any worst-of structure, he said. The coefficient of correlation between the underlying indexes is 0.86.

More participation

“The note is structured to maximize your chances of outperforming the market both ways,” he said.

The buffer made this probability certain given its size. On the upside however, the amount of leverage may not always be enough to compensate investors for the loss induced by the non-payment of dividends over a five-year period.

“I’d want to participate at a higher clip with a cap,” he said.

“Alternatively, I may reduce the protection level or extend the duration. Yon pick up better terms moving from five to six years. It varies depending on the funding rates.”

The notes will be guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes (Cusip: 48129MHM1) will price on Wednesday and settle on April 30.

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