Barclays’ dual directional notes on S&P, Nasdaq seen as hedged bearish bet

By Emma Trincal

New York, Feb. 16 – Barclays Bank plc’s 0% dual directional notes due Feb. 28, 2025 linked to the lesser performing of the S&P 500 index and the Nasdaq-100 index offer absolute return on the downside for investors holding a bearish bias, advisers said. Unfortunately, the payout on the upside was not enticing enough for those advisers.

If the final level of the lesser-performing index is greater than or equal to its initial level, the payout at maturity will be par plus the lesser-performing index’s return, capped at par plus 35%, according to a 424B2 filing with the Securities and Exchange Commission.

If the final level of the lesser-performing index is less than its initial level but greater than or equal to its barrier level, 75% of its initial level, the payout will be par plus the absolute value of that index’s return.

If the final level of the lesser-performing index is less than its barrier level, investors will be fully exposed to losses of the lesser-performing index.

Absolute return

“These absolute return are tricky,” said Michael Kalscheur, financial adviser at Castle Wealth Advisors.

“They work great until a point. Once you breach the barrier it can get a little dicey.”

Separately, Kalscheur objected to the 4.1% fee disclosed in the prospectus.

“I noticed the fee is enormous,” he said.

“In today’s day and age that’s way out of bounds.

“We have no issues with Barclays as an issuer. The indexes are well-known, so that’s good. But once you get into the technicalities of the deal, it’s not that exciting.”

Weak on the upside

The notes are the most appealing when the worst-performing index is negative and above barrier level. But Kalscheur was not satisfied with the payout on the upside, mainly due to the cap level, which is at 7.8% per annum on a compounded basis.

“The cap is too low,” he said.

“Under normal conditions, either one of those indexes will be up 9% or 10%. There’s a pretty good chance you’re going to hit that cap.”

Other factors made the upside improper for any bullish investor, according to this adviser.

“It’s only one-to-one of the underlying. And it’s a worst-of. You really cannot be any kind of a bull and look at this note reasonably,” he said.

If the underlier finished positive, investors would be guaranteed to underperform since the loss of dividends would not be offset by any leverage or return enhancement feature. Should the return be above the cap, investors would underperform even more, he noted.

Bear only

The notes would be suitable only for investors who have a bearish bias, he noted.

“You’re hoping to get a negative return. The bigger the negative return, the greater the absolute return, and in that case having the worst-of exposure works better for you, assuming you don’t breach the barrier,” he said.

“But these are bets on a very narrow range.

“You’re really betting against the market by focusing on the absolute return.

“The market is down 10%, you’re up 10%. You outperform the market by 20%. That’s fantastic, but the odds are against you.”

Tenor

That’s because the four-year tenor was less likely to provide the desired outcome than a shorter maturity, he said.

“The biggest danger zone for a double-digit market decline is between two to three years. Over four-year, chances are the market will be down then up significantly,” he said.

In such case, even if the index remains negative at maturity, the gains could remain modest.

“It’s a narrow range. You have a bearish bias.

“If you’re wrong and the market is up, at least you don’t lose money as you would with a bearish note.

“I would call it a hedged bearish bet. If it’s down a little, you make money. If it’s up, you don’t lose money.”

Capped on both sides

The only concern was the “narrow range” of potential gains, he said, since investors may not earn more than 25% on the downside and 35% on the upside.

“I guess for investors who are sitting in cash and won’t come off the sidelines, it could be an incentive to put some money at work. If the market is down, you’re up. If it’s up a little bit, you’re up but not much,” he said.

Income is better

Kalscheur found autocallable contingent coupon notes more attractive. They too deliver positive returns on the downside down to the barrier threshold. They can also have a shorter duration.

“With an income note, you get a fixed return if it’s above 75%,” she said.

The payoff gives investors a coupon whose amount is the same regardless of the index decline above the barrier.

“An autocall would be a much better choice if you want to make money on both sides of the market,” he said.

“The market is down, you get paid. The market is up, you get called,” he said.

“I think this note is not as good.

“We’ll take a pass on it.”

Recovery risk

Elliot Noma, founder of Garrett Asset Management, said he could see why some investors would consider the notes, although he does not count himself as one of them.

“I guess if you’re a bear, if you’re concerned about a market bubble about to burst, there is a logic to this note,” he said.

“The Nasdaq is the most volatile of the two. If we had a crash, the Nasdaq would probably drop the most.”

But Noma said he would not use the note for two reasons.

“First, the timeframe: four years is long enough to give the market ample time to rebound, in which case you may miss a recovery rally,” he said.

“Second, even if we have a crash, the central banks will react quite quickly and take immediate actions to stop the bleeding.”

Noma is not bearish. He said that he is “fully invested” at this point, which is why he would not have a use for the notes.

“But for somebody who has a more bearish point of view, it would make sense,” he said.

Limitations

Steven Foldes, vice-chairman of Evensky & Katz / Foldes Financial Wealth Management, said he saw no reason to buy the product.

“I don’t like that note at all,” he said.

“The capping of a four-year note on two major indices at 35% is well below the historical return on both of them, not to mention the loss of dividends.

“Your upside is very limited as a result.

“And the downside doesn’t even have a hard buffer. If we have a catastrophic period with losses taking you beyond 25%, you lose the protection. You lose the full amount of decline.”

Even if the index declines within the absolute return range, the amount of return remains subdued by the barrier.

“If you’re down 10% over four years, you just get the absolute return. So, if the market is flat, that’s all you’re going to get.

“You don’t get any leverage; you don’t get the dividends. What you get is a low cap. And you pay over 1% a year for the privilege of investing in this note.

“I would stay away from it,” he said.

Barclays is the agent.

The notes will price on Feb. 23 and settle on Feb. 26.

The Cusip number is 06748E3F8.

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