Barclays, Citigroup offer similar dual directional notes on S&P, but bullish biases differ

By Emma Trincal

New York, June 17 – Two issuers are readying dual directional barrier notes with the same underlying and terms on the downside. But the upside payouts due to their differences allowed advisers to express their views on how each product would fit into their respective portfolio.

One note showed a higher cap with less leverage than the other.

Both products feature a three-year maturity and leveraged capped exposure to the S&P 500 index.

Comparable deals

The first issue, Barclays Bank plc’s dual directional trigger Performance Leveraged Upside Securities due July 6, 2022, will pay at maturity 2x the gain up to a 27.3% maximum return, according to a 424B2 filing with the Securities and Exchange Commission.

The second offering – Citigroup Global Markets Holdings Inc.’s dual directional barrier securities due June 28, 2022, pays 1.25x leverage on the upside up to a 49% cap, according to a separate 424B2 filing.

Both deals are easily comparable as the terms on the downside are identical: if the index falls by up to 20%, the payout will be par plus the absolute value of the index return. Otherwise, investors will be fully exposed to any losses.

Meeting a target

Carl Kunhardt, wealth adviser at Quest Capital Management, said he sees the products as complementary.

“Depending on what your approach is, they serve two different objectives. But I’d take them together,” he said.

“You’re going to be in U.S. large-caps regardless. Whether the market is up or down, you’re in it,” he said.

“With the first one, I’m just trying to fill a slot in my asset allocation. With the other one, I’m trying to get as much return out of this asset class. There’s room for both in your portfolio.”

The Barclays notes offer more leverage but a lower cap. Investors if “capped out” would get an 8.38% compounded annualized return. The index would only have to rise by 4.36% a year.

With the Citigroup notes, investors can satisfy a more ambitious return of 14.22% on an annual compounded basis, which would be the maximum. But this result requires a more bullish market growing at a pace of 11.66% a year.

As a financial planner, Kunhardt said the cap on the first deal matches his own market return expectations for the S&P 500 index.

“Our expectations are aligned with Mercer’s projections, which is about 8.5% a year,” he said.

“As a planner, all I need is to meet my target. I don’t need a 20% return. I need a consistent, realistic and practical target return.

“Since I’m going to be long the S&P 500 anyway, should I be long the index or buy this note?”

Without hesitation, Kunhardt said the notes were a better option.

“It gives me a safety net of 20%. And because of the 2x leverage, all I need is a very muted return and I meet my goal.”

Financial planners, he explained, differ from brokers in that they must ensure that the investment plan supports the financial plan.

“That first deal meets my baseline financial plan. It makes it work,” he said.

“All I need is that 8.5%. The cap isn’t relevant to me.”

Stretching returns

But the Citigroup note had its own benefits.

“The second one has a place in your portfolio too,” he said.

“You’re going to have ups and downs in the market. There are going to be times when your asset allocation won’t achieve that target. That’s when the other note comes into play.”

The second note with the higher cap allowed the planner to “stretch” his return potential.

“The objective is to exceed your target to make up for the years that you don’t meet your goals,” he said.

He noted that both structures brought the same benefits on the downside with a 20% soft protection and absolute return potential.

“It’s a win-win.

“I might consider both notes concurrently in the same portfolio,” he said.

Protection first

Jerry Verseput, president of Veripax Financial Management, said he liked both notes except for the absolute return.

“I don’t care for it. You pay something for that. I would rather add some protection than trying to make a little bit of money on the downside.

“I don’t want to make a buck in a down market. I just want to be less sad.”

Buffer

Trading the absolute return for a lower barrier would be an option. Another one would consist of replacing the barrier by a buffer.

“Even without the absolute return you may still not have enough money to get a 20% buffer. But you may be able to get a 15% buffer, which I would still prefer. If the market is down 21%, you’re only down 6%.”

Higher cap

Looking at the upside structure, however, his preference went for the Citigroup note with the higher cap and lower leverage multiple.

“I think it’s simply because the first one is designed for a flat market. And in a flat or slightly up market, I have other options that can give me 8% or 8.5% starting with contingent coupon notes on indices.

“I like this higher cap one because if things start to go up again you don’t want to miss out on the upside having that cap.”

Barclays is the agent for the first deal with Morgan Stanley Wealth Management as a dealer.

The offering will price on June 28.

The Cusip number is 06747B456.

The Citigroup notes will be guaranteed by Citigroup Inc. and the underwriter is Citigroup Global Markets Inc.

The notes will price on June 21.

The Cusip number is 17326YLL8.

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