JPMorgan’s $533,000 capped notes tied to Nasdaq, S&P show competitive buffer on two-year tenor

By Emma Trincal

New York, Sept. 24 – JPMorgan Chase Financial Co. LLC’s $533,0000 of 0% capped buffered equity notes due Sept. 27, 2022 linked to the lesser performing of the S&P 500 index and the Nasdaq-100 index present a defensive profile with a generous buffer. In exchange, the upside is capped and unlevered. But the cap is high enough to make the trade-off worthwhile, advisers said.

If the final level of each index is greater than or equal to its initial level, the payout at maturity will be par plus the return of the least performing index, capped at par plus 26.25%, according to a 424B2 filing with the Securities and Exchange Commission.

If any index falls by up to 25%, the payout will be par.

Otherwise, investors will lose 1% for every 1% that the least performing index declines beyond 25%.

13% per year

Usually giving more downside protection involves extending the maturity of a note, observed Steve Doucette, financial adviser at Proctor Financial.

“That’s not the case here. You’re getting a huge buffer two years out, which is pretty good,” he said.

“With 25% in a hard buffer, you’re going to outperform if we have a pullback.

“On the upside, a 26% cap isn’t bad. That’s a 13% annualized. It’s a nice thing to take home.

“The market is pretty high. You already have a good protection level. If you’re OK with the capping, it’s kind of a neat note.

“Of course, the market could be skyrocketing in two years if we get a vaccine.

“But we don’t know. Right now, we have the Elections. Who know what’s going to happen?”

Valuations and term

“From a valuation perspective it makes sense to be concerned about the downside.

“Both indices are up. A stock like Tesla is in the Nasdaq. These are concerns.

“But when will the market really drop? We don’t know. Again two years out isn’t bad. A lot of bad news could be behind us,” he said.

While downside protection is always valuable, Doucette said he would probably be willing to cut the buffer by a modest amount in order to generate some leverage on the upside.

Getting more

“I like the 25% buffer, but I could live with a 20% buffer just as well. For giving up 5% of the buffer I might try to get a little leverage over the next two years,” he said.

The two-year tenor was a positive.

“It will be after the Covid crisis. So, you have to think about the type of upside you want. You may not be able to raise the cap and get the leverage both at the same time.

“You’d have to choose between the leverage and a higher cap, and that’s a tough call because it depends on your market outlook. Two years out it’s hard to tell,” he said.

“I’d have to see what I can get if I go for 20% instead of 25% on the buffer.”

Madly bullish

Matt Medeiros, president, and chief executive officer of the Institute for Wealth Management, who wants to provide adequate protection to his clients, said he liked the notes despite the one-to-one upside participation and cap.

“Having some leverage wouldn’t give us the buffer that we want. A 25% buffer is very efficient,” he said.

The cap was high enough to justify the absence of leverage given this adviser’s market view.

“I think the cap is a little bit higher than our return expectations over the next two years.

“I’m fine with it even without leverage,” he said.

“We’re not getting a haircut. If the return exceeds our expectations, that’s great.”

Leverage, of course, is always a useful tool when markets go up modestly. But Medeiros puts principal protection ahead of his other goals at this point in the market cycle.

“What I really find appealing is the 25% buffer for such a short-term note,” he said.

Correlation

Medeiros is cautious with worst-of payouts because the exposure is to the risk of each index and not to the average performance of the two.

If one underlier declines and the other rises, there is no risk mitigation. The positive performance will not partially or totally offset the negative return.

As a result, higher correlations between the underlying help mitigate dispersion risk.

The S&P 500 index and the Nasdaq-100, both large-cap indexes, have a one-year coefficient of correlation of 0.935, according to FactSet.

“I’m pretty comfortable with the correlation between those two indices,” he said.

“And it doesn’t really surprise me. They both have the same top five holdings.”

Apple Inc., Microsoft Corp., Amazon.com Inc., Facebook Inc. and Alphabet Inc. make for 22% of the S&P 500 index and 45% of the Nasdaq-100 index.

“I’m not a fan of worst-of, but if I get this kind of exposure, I want to have two highly correlated underlying securities like those two.

“That way I can come up with my return characteristic, budget my risk and better predict my expected outcome.”

“This is an interesting note.”

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes priced on Tuesday and will settle on Friday.

The Cusip number is 48132PAU8.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.