JPMorgan’s uncapped buffered notes on indexes show unusually good terms for a two-year

By Emma Trincal

New York, Aug. 15 – JPMorgan Chase Financial Co. LLC’s 0% uncapped dual directional buffered return enhanced notes due Aug. 14, 2025 linked to the least performing of the Nasdaq-100 index, the Russell 2000 index and the S&P 500 index, surprised advisers by the quality of the pricing for a short-dated product.

If the worst performing index gains, then the payout at maturity will be par plus at least 109.25% of the return of the worst performing index, according to a 424B2 filing with the Securities and Exchange Commission.

The exact participation rate will be set at pricing.

If the worst performing index falls by up to 20%, the payout will be par plus the absolute value of the return of that index.

Otherwise, investors will lose 1% for every 1% decline of the worst performing index beyond 20%.

Good news

Steven Foldes, wealth manager and founder of Evensky & Katz / Foldes Financial Wealth Management, said there were many positive sides in the deal.

“First, we do like the very strong credit of the issuer and the short maturity. We also like the small 0.65% fee,” he said.

“Second, the note is uncapped and there is some leverage although it’s a modest amount of leverage.

“Finally, we like the buffer, which is far more important than a barrier. If we have a difficult economy or some kind of geopolitical event leading to a bad market, the buffer will be helpful, especially a 20% buffer, which is a lot of protection.”

Foldes was also satisfied with the entry point of the trade. The U.S. markets are still below their all-time highs of January 2022 for the S&P 500 index and November 2021 for the Russell 2000 and the Nasdaq-100, he noted.

“We’re not going in at a terribly high spot. The timing is reasonable,” he said.

Divergences

But not everything was perfect with the structure.

“The bad news is that I don’t love worst-of, especially when you have three indices,” he said.

While correlations may be high between the three U.S. indexes, the differentials in terms of performance are significant, he noted.

“And that can be a problem,” he said.

So far this year, the Nasdaq has jumped 31% while the S&P 500 index gained 16%. The Russell 2000 has only increased by less than 8%.

“If you’re exposed to the worst-of, you may get a return of 8% versus 31%,” he said.

“As much as we like the other features, the fact that you see such a divergence in returns would be a non-starter for us,” he said.

If he had to restructure the note, Foldes’ objective would be to reduce or even eliminate the worst-of exposure.

“I would do away with the dual directional since I’m getting the downside benefit by virtue of the buffer anyway,” he said.

“I’d much rather reduce the number of indices to two and ideally, have no worst-of at all,” he added.

Foldes said he would maintain both the uncapped leveraged upside and the two-year tenor. If necessary, he would be willing to reduce the buffer if it meant getting a single index exposure, with an index of his choice.

“There’s a lot to like about this note. But we don’t like the worst-of with such return dispersion between the indices,” he said.

Unusual no-cap

A financial adviser was much more upbeat about the investment.

“This note has everything I usually look for. Most of the terms you’re getting – uncapped leverage with a 20% buffer and absolute return – you would expect to have in a four-, five- or six-year note,” he said.

The absence of any cap, he added, was particularly unusual on a two-year tenor.

“Almost every two-year note I see is capped with or without leverage and those caps are restrictive. You may in some cases lose 60% of the upside,” he said.

This adviser added that the leverage, while modest, was also unexpected on a short-term uncapped product.

Buffered protection

But the defensive profile of the note was “even more impressive,” he said, adding that it was “extremely uncommon” to get a 20% buffer with absolute return on a two-year note.

“It’s hard to tell how JPMorgan was able to price this. I have a feeling that it’s through the worst-of. The 0.65% fee may have helped too,” he said, based on the fee amount disclosed in the filing.

This adviser assessed the probabilities of return outcomes using statistical performance figures over two-year rolling periods for each index.

The chances of an index dropping more than 20% were 5.6%, 5.6% and 8.8% for the S&P 500 index, the Russell 2000 and the Nasdaq-100, respectively.

“We can see how the volatility of the Nasdaq comes into play. But even if your index drops more than 20%, you’re still outperforming with the buffer. If one of these three is down 40%, you’re down 20%. Any client would be pretty happy with that,” he said.

Dual directional

This adviser then looked at the chances for each index to fall within the absolute return range.

The probabilities were 11.8% for the S&P 500, 12.9% for the Russell 2000 and 5.1% for the Nasdaq.

“One of the nice perks of this note is that your chances of outperforming with the absolute return are pretty good, except for the Nasdaq, which may explain how they were able to price this note.”

“In my book, this note is phenomenal,” he said.

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes were expected to price on Friday and to settle on Wednesday.

The Cusip number is 48133YN83.

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