Barclays’ leveraged capped notes on S&P 500 are designed for toppish market, offer protection

By Emma Trincal

New York, July 3 – Barclays Bank plc’s 0% market-linked notes – leveraged upside participation to a cap and fixed percentage buffered downside due Aug. 3, 2023 linked to the S&P 500 index – are attractive in a range bound market, particularly after a nearly decade-old boom in equities, advisers said.

The payout at maturity will be par plus 150% of any index gain, up to a maximum return of 50% to 55%, according to a 424B2 filed with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 15% and lose 1% for each 1% decline beyond 15%.

“This note makes sense if the market returns are very modest or range bound,” said Tom Balcom, founder of 1650 Wealth Management.

That is because at a cap of 50%, it only takes a 5.9% growth in the underlying index to bring the return to its maximum level.

Dividends

Balcom said investors should evaluate the negative aspect of not receiving dividends when opting to buy the notes versus the index fund. The S&P 500 index yields 1.80%.

“Over five years, that’s an opportunity cost of 9% for the noteholder,” he said.

But the 1.5 times leverage reduces and even eliminates such cost at a certain return threshold.

Starting at a price return of 18% over the five years, investors become better off owning the notes than being long the index. At this point the benefits of leverage offset the loss of dividends.

“It’s a low break-even. The leverage takes care of the loss of dividends relatively easily,” he said.

Downside

Balcom also liked the buffer. But as the market is close to a peak, more conservative investors should probably aim for more downside protection, he said.

“If the market is down 30%, you’re still down quite a bit.”

For mildly bullish investors however the notes are a good fit.

“It really makes sense for someone who thinks the market may be up a little bit more but not that much because we’re already at record high levels,” he said.

Tenor

Balcom was more concerned with the length of the notes and how his clients may read into valuations.

“The problem is the five year. Clients don’t have a five-year time horizon for anything,” he said.

Typically, Balcom invests in structured notes with a maturity of three years or less.

“Clients have a short attention span,” he said.

“They read their statements quarterly. If the market is up 15% next year, the note will not be up 15% because of the long-dated five-year zero coupon bond and the way options are priced.

“That’s when we have to spend a lot of time talking to them. It’s a lot of hand-holding and you get into a different conversation.”

Straightforward

Donald McCoy, financial adviser with Planners Financial Services, said the notes were attractive in the current market environment.

“Given where we are at valuation-wise, I can see it as being an attractive offering,” he said.

“If you scatterplot returns based on P/Es over a five-year rolling period, you get into the mid-to-low single-digit returns area.

“If you bought the index fund outright, you’d have to get close to 8.5% a year to get to that 50%.”

Many analysts and equity strategists expect less over the next few years as the nine-year bull cycle may be nearing its end, he noted.

“A lot of people would see that note as a good option, particularly with the 15% buffer.”

A 20% drop in the index price after five years would only generate a 5% loss in principal, he noted.

“This one is nice and straightforward. Not a lot of moving parts to it...the kind of note that’s easy to explain and understand,” he said.

Barclays and Wells Fargo Securities, LLC are the agents.

The notes will price on July 31.

The Cusip number is 06746XGA5.

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