CIBC’s pair of buffered notes on S&P 500, Nasdaq may be too short to work, advisers say

By Emma Trincal

New York, March 2 – Canadian Imperial Bank of Commerce plans to offer two comparable notes designed for investors seeking buffered exposure to U.S. markets. But advisers reviewing the notes expressed discomfort with either the size of the upside cap or the amount of downside protection.

In both cases, these advisers said that making the notes longer could resolve some of the problems they pointed to in their respective analyses.

One offering consists of 0% market-linked securities due April 7, 2025 linked to the performance of the S&P 500 index, according to an FWP filing with the Securities and Exchange Commission.

The payout at maturity will be par plus any index gain, subject to a maximum return of par plus at least 20%. The exact maximum return will be set at pricing.

If the index finishes flat or falls by up to 15%, investors will receive par plus the absolute value of the index return.

Investors will be exposed to any losses beyond the 15% buffer.

The second issue consists of notes maturing on Oct. 4, 2024 linked to the Nasdaq-100 index, according to another FWP filing.

This second note is levered on the upside at a rate of 2. On the downside, the notes differ from the other with a smaller buffer of 10% and the absence of the absolute return.

The cap is also expected to be at least 20%.

Caps for bears

“I don’t like either one of those notes. They’re pretty bearish, capping you at 20%,” said Steve Doucette, financial adviser at Proctor Financial.

For bears, the unlevered notes on the S&P 500 index may be a better fit, although not for him.

“If you’re bearish, you might as well capture the potential 15% absolute return with the 15% buffer. That means you probably should go with the S&P note,” he said.

“The other one doesn’t offer enough buffer. The Nasdaq is pretty volatile, so 10% on the downside may not be enough. Plus, they don’t give you the absolute return on that one.

“The S&P is a little bit safer because the index is not as volatile as the tech-heavy Nasdaq.”

In both cases however the existence of a buffer allowed investors to outperform the benchmark on the downside although such objective is better met with the absolute return, he said.

Missing the rally

Both notes however were too bearish for Doucette.

“Two years out, do I want to cap myself up at 10% or 12% a year? The market moves so quickly. I just don’t like either one of those notes because of the 20% cap,” he said.

If inclined, Doucette may redesign the structure of each product.

“What do I need to do to eliminate this cap? I wouldn’t mind extending the term a little bit. I don’t know how much I would need to extend it to eliminate it. That’s the big question,” he said.

Leverage

Even the 2x leverage offered by the Nasdaq-linked notes was not enough of an incentive for this adviser.

“OK, it’s leveraged. But you’re still going to be capped out at 20% on an 18-month. During that time, we could be off to the races.

“The cap is the same on both deals. It doesn’t increase. Only the buffer gets bigger if you switch to the Nasdaq one. At least you get a little bit more protection. But it’s only 5% more. Is this extra 5% enough to protect you against the volatility of the Nasdaq? Also, you lose the absolute return,” he said.

Hedging

Investors may use the notes as a hedge in a bearish environment.

“I guess in this context you can use any of them to protect your equity exposure,” he said.

The note on the S&P 500 index would probably be a better hedge, he said, since it provides the absolute return within a larger buffer band.

But even without such feature, the 10% buffer offered in the Nasdaq-linked notes would allow investors to outperform on the downside although not as efficiently, he added.

“They’re both so bearish, you could use them to hedge an equity position,” he said.

“It all boils down to doing your due diligence to see which of those two indices you’re the most comfortable with.

“I know I wouldn’t use any of these notes. I don’t like the cap,” he said.

Low return expectations

Matt Medeiros, president and chief executive of the Institute for Wealth Management, looked at the leveraged note first.

“I wouldn’t be interested in this Nasdaq offering. It seems strange to have this 2x leverage with a low cap of 20%,” he said.

Investors with low return expectations may find the leverage attractive, he added.

“To me, the volatility of the index requires more return than that,” he said.

The Nasdaq-100 index would have to increase by only 6.56% per year to allow investors to reach the 20% maximum return at the end of the 18-month term.

“If you’re going to do 2x leverage then definitely remove the cap or raise it,” he said.

“With the Nasdaq as your underlier, it seems to me that the cap is too low.”

Buffer and volatility

The downside buffer was not a redeeming factor.

“Having a 10% buffer with the Nasdaq on an 18-month period doesn’t appeal to me,” he said.

“It’s harder to price a buffer over shorter periods of time so they tend to be lower, I get it. But I’m not getting enough protection with the volatility of this index.”

Going longer

Medeiros had a more favorable opinion on the S&P-linked product.

“This particular one is a plain-vanilla type of note,” he said.

“The part that makes it attractive is the absolute return. If it didn’t have that, I’m not sure I would be interested.”

The size of the buffer however should be greater than 15% in order to make the product more defensive, he said.

“I would want to have a bigger buffer. Since you probably couldn’t price that on a short-dated note, I wouldn’t mind going longer,” he said.

The notes had a lot of common characteristics. Both featured the same minimum cap level, a buffer on the downside and short tenors.

But they may also complement each other depending on an investor’s view on each index.

“Maybe the pair was designed with a specific situation in mind and for a specific client,” he said.

Wells Fargo Securities, LLC. is the agent for both offerings.

The notes linked to the S&P 500 index (Cusip:13607XG76) will price on March 31 and settle on April 5.

The notes tied to the Nasdaq-100 index (Cusip: 13607XG68) will price on March 30 and settle on April 4.

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