Morgan Stanley’s $500,000 PLUS linked to S&P 500 offer double-digit cap, buffer

By Emma Trincal

New York, April 9 – Morgan Stanley Finance LLC’s $500,000 of 0% Buffered PLUS due May 6, 2027 linked to the S&P 500 index provide investors with a satisfying cap, a financial adviser said. But opinions diverged regarding the level of downside protection given the current market uptrend.

If the index finishes at or above its initial level, the payout at maturity will be par plus 120% of the index return, subject to a cap of 43%, according to a 424B2 filing with the Securities and Exchange Commission.

If the index finishes below its initial level, investors will receive par if the index declines by 15% or less and will lose 1% for every 1% that it declines beyond 15%.

The initial index level will be the average of the index’s closing values on each of the initial averaging dates, which represents a period of about three months from and including April 3 to and including June 26.

Rally is relative

Tom Balcom, founder of 1650 Wealth Management, said that the timeframe and entry point of the notes should give investors enough protection against market losses, especially with the 15% buffer.

“The market had a nice run in the past 18 months. The question is: is 15% enough downside protection 37 months from now? I think so,” he said.

Last year’s rally was mostly a rebound from the correction seen during the first 10 months of 2022, he said.

“The S&P has gone up a lot. But it’s only earlier this year that we closed the gap from the losses of 2022.

“It took us two years to revisit the highs of January 2022.

“It’s not like we’re going to the moon,” he said.

Cap, tenor

The cap was a positive piece of the upside payout, according to this adviser.

“The 1.2 times leverage is not a lot. But it compensates you for the lack of dividends,” he said.

“43% is a good cap for this tenor. You get a double-digit return. Clients like it. A 10% plus annualized, that’s what they anticipate when they consider buying a note.”

The 43% cap over the 37-month tenor with 1.2 times leverage is the equivalent of a 12.3% annualized compounded return.

“I also like the three-year term. Three years allows you to go through an entire market cycle,” he said.

“It looks like a good note.”

Safety first

Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments, did not think the structure offered enough protection.

“I think the leverage is a waste. A buffer would be more useful. I’d much rather have a bigger buffer and no leverage,” he said.

“Investors have to consider everything they’re giving up. They’re giving up the dividends. They’re giving up liquidity. They’re giving up some of the upside.”

The dividend yield of the S&P 500 index is 1.4%. Over the period, investors incur an opportunity cost of approximately 4.5%, he noted.

The limited liquidity was a more serious concern.

“It’s a big deal when you consider how liquid the S&P is whether you’re looking at ETFs, options or futures,” he said.

Tradeoff

For Kaplan, the tradeoff was not favorable to investors because the buffer should have been bigger.

“If you’re giving up all these things, you want a significant compensation,” he said.

“You would need a very generous buffer. You could get rid of the leverage and, if it’s necessary, lower the cap a little bit.”

The most important feature should be the downside protection especially for a three-year note, he said.

“If we have a bear market, stock prices in the early part of 2027 will be pretty down from today. May 2027 may not be the worst but it’s not going to be good.

“I expect the first quarter of 2027 to be relatively depressed.

“This note doesn’t give you enough downside protection,” he said.

The notes are guaranteed by Morgan Stanley.

Morgan Stanley & Co. LLC is the agent.

The notes will settle on Wednesday.

The Cusip number is 61776LRQ2.

The fee is 0.25%.

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