Citi’s dual directional buffer digital plus on indexes, ETF seen as defensive, long-term bet

By Emma Trincal

New York, April 5 – Citigroup Global Markets Holdings Inc.’s 0% dual directional buffer digital plus securities due Oct. 5, 2026 linked to the least performing of the Dow Jones industrial average, the S&P 500 index and the Invesco S&P 500 Equal Weight exchange-traded fund provide an opportunity to outperform the market in a moderately bullish and slightly negative environment, advisers said.

If the least-performing underlying’s final level is greater than its initial level, the payout at maturity will be par plus the greater of that underlying’s return and 28%, according to a 424B2 filing with the Securities and Exchange Commission.

If the least-performing index’s final level is less than or equal to its initial level but greater than or equal to its final buffer level, 85% of its initial level, the payout will be par plus the absolute value of the least-performing index’s return.

If the least-performing index’s final level is less than its final buffer level, investors will lose 1% for every 1% that the least-performing index declines beyond 15%.

All things considered

Carl Kunhardt, wealth adviser at Quest Capital Management, said he may consider the notes despite an initial negative reaction.

“My first impression was: I don’t like the notes. It’s a five-and-a-half year and five years is the longest maturity I can contemplate. I also don’t like worst-of. I never really liked them,” he said.

“But beyond these two points, it’s not that bad of a note. I might consider it.

Underliers

Kunhardt examined the underliers first, saying it was an odd mix.

“As with any note, what really counts is the underlying exposure. That’s what drives the return,” he said.

“I never really understood the attraction for the Dow Jones industrial average. It’s 30 stocks that are not representative of the American society at all,” he said.

“The S&P 500 index on the other hand is a good proxy. It’s the principal proxy for the U.S. equity market. Except that it has an Achilles’ heel. It’s a capitalized-weight index. You have a minority of highly valued stocks with high market capitalizations, essentially tech stocks. And those large cap stocks are the ones that drive the return of the index.”

The tech wildcard

In comparison, the S&P 500 Equal Weight index is more representative of the overall economy, he said.

“When I look at a worst-of, I pretty much have an idea what the worst-of is going to be. If you have the S&P and the Russell 2000 you know the Russell is going to lead on the upside ahead of an economic recovery and that it will drop first and faster when you’re about to enter a recession,” he said.

“Here, if I leave aside the Dow Jones, it’s harder to guess. It’s more of a sector play. If tech stocks are doing well, you know the straight S&P is going to do well. The equally weighted will be the worst-of. And if tech is beaten up as it has been over the past few weeks, then the S&P 500 is going to be the worst-of and the equally weighted one will do better.

“So, you’re trying to read the tea leaves on the 30 top-performers of the S&P.”

Terms

The structure itself offered a more positive picture.

“I very much like the guaranteed minimum return. In fact, I like it more than having some leverage. It’s a more conservative approach. If it’s positive, you get at least 5% a year.”

Kunhardt’s outlook is only moderately bullish. He expects the S&P 500 index to return about 6.5% a year over the period.

“It’s not that far out. So that’s good.”

On the downside, the buffer was “pretty generous,” he said, adding that “you don’t find 15% buffers that often.”

In addition to that, investors have the benefit of the absolute return.

“Overall, I like the note,” he said.

“I don’t like that it’s a worst-of. The term is a little bit long, but they probably had to go that long to be able to price these parameters.”

Michael Kalscheur, financial adviser at Castle Wealth Advisors, did not object to the structure nor was he uncomfortable with the underliers. But the note was limited to risk-averse investors with a limited chance to make a decent return in a strong market.

A good pair

“I like the Invesco equal weight. I own it myself. When the Apple, Amazon, Google outperform, you’re happy to own the S&P 500. But trees can’t grow to the sky and at some point, it makes sense to get the equally weighted version of the S&P. You still own the big ones,” he said.

The two versions of the S&P 500 showed a high correlation coefficient of 0.89, which is attractive when the exposure is to a worst-of, he added.

“All three indexes are very well-known. Clients are familiar with them. I’m on board with that,” he said.

Positive terms

“The long-term nature of the note is not a problem for us. We also like the 0.75% fee. It’s very reasonable for us.”

The fee amount was disclosed in the prospectus.

“The buffer is in there, so that’s good. I’m a big fan of having downside protection.

“And you also get the absolute return. You can make 15% on the downside. That’s very good,” he said.

Outperformance potential

Investors will beat the market anywhere between minus 15% and plus 28%, he noted.

“Of course, you can’t ignore the dividend portion. You may give up something around 10% in dividends over the term.

“If the market is up 100%, you’re going to get 90%. You’re not going to get in hot water for that,” he said.

What made the upside attractive was the absence of a cap, he noted. If the 28% had been a cap rather than a minimum return, Kalscheur said his view on the structure would have been negative.

“There’s a fairly good argument to be made that if you’re down, you win with the buffer. If you’re slightly up or flat, you outperform with the digital. And if the market is up a lot more, you will trail on the upside because of the loss of dividends but you still participate,” he said.

“At least, you’re not capped.”

Defensive play

Still, Kalscheur said the “window of outperformance” was a little bit too narrow for his clients.

“We’re usually more optimistic than that,” he said.

Looking at back-testing data on the S&P 500 index since 1950, he said that over a five-and-a-half year rolling period, the chances for the index to fall within the minus 15% to plus 28% window was only 17.6%.

“You would have to have a slightly negative view to like this note. We think that over time, the market is going to be up, not down or flat,” he said.

“Is it a bad note? Not at all.

“But this is geared for someone who is nervous about the market hitting all-time highs. It’s a defensive play on equities.”

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter.

The notes were expected to price on March 31 and to settle on April 6.

The Cusip number is 17329FBV5.

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