Citi’s buffer securities with no cap tied to SPDR Dow may lack in upside participation

By Emma Trincal

New York, Feb. 5 – Citigroup Global Markets Holdings Inc.’s 0% buffer securities due Feb. 27, 2023 linked to the SPDR Dow Jones Industrial Average ETF Trust could be used as an alternative to a long position in the index, said Carl Kunhardt, wealth advisor at Quest Capital Management.

The existence of leverage however would be critical to make a buying decision, Kunhardt said, while another financial adviser noted that there was too little of it to make the notes attractive.

The payout at maturity will be par plus 100% to 110% of any index gain, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 10% and will be exposed to any losses beyond 10%.

Alternative to the ETF

“I can see myself using this note,” said Kunhardt.

“It’s a major index that’s going to be in your portfolio at all times anyway.”

Because the upside participation will be within the 100%-110% range, it is possible that the notes will only provide a one-to-one exposure to the underlying, he noted.

“When I look at a structured note I compare it to holding the position in stocks,” he said.

“If there is leverage, anything above 1 is better than holding the stocks.

“You get the leverage and that makes up for the dividends.”

The trailing 12-month dividend yield of the underlying shares is about 1.84% according to the prospectus.

As a result, investors in the notes will be foregoing an aggregate yield of approximately 9.20% assuming no reinvestment of dividends, according to the risk factors section of the prospectus.

Leverage

Kunhardt said that his interest in the notes would depend on the final leverage amount.

“I would have to see how the deal prices. If there is no leverage, I would probably not do it. That’s kind of the end of the argument. I would put the notes aside,” he said.

Even with the highest leverage factor of 1.1, the underlying shares would have to generate an annual return of approximately 14% to outperform a long position in the fund.

Downside

The 10% buffer “is always good to have,” he said.

But he added that it was probably not going to be necessary.

“The fact that it’s point-to-point is very important. The fact that we just had a big sell-off last week is also good because you get a better entry point,” he said.

Since its high at the end of last month, the Dow Jones ETF has lost 6.6% as a result of last week’s sell-off, which extended on Monday. On Monday, the Dow fell another 4.60% for the day.

Kunhardt said he was not too concerned about the current volatility.

“I’m looking at the big picture. Over a five-year trailing period, I’ve never seen the Dow Jones finishing down.”

He reiterated that the risk associated with the product will depend on its final terms.

“If there is no leverage, I wouldn’t do it. It doesn’t benefit me to be locking it for five years in that case,” he said.

No particular benefit

A financial adviser, whose firm buys structured products for its clients, said he did not find the product appealing.

“It’s one of those products that gets sold rather than bought,” he said.

“I don’t really see why you wouldn’t buy the ETF directly instead.”

The shareholders in the fund as they earn the dividends would get with the aggregate yield approximately the equivalent of the 10% buffer on the downside, he noted.

“It doesn’t give you any particular benefit. You’re not really outperforming on the downside,” he said.

The upside leverage would be weak at best, even at its maximum factor.

“You may not make up for a loss,” he said.

Finally, this adviser looked at the 3% fee, or 60 basis points per annum.

“On a per-year basis it’s not terrible, but it’s still high,” he said.

“I don’t think it’s worth it.”

The notes will be guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter.

The notes will price on Feb. 22.

The Cusip number is 17324XJK7.

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