Barclays' Super Track notes with 80% trigger on SPDR S&P MidCap target cautious bulls

By Emma Trincal

New York, Nov. 8 - Barclays Bank plc's 0% Super Track notes due Nov. 28, 2014 linked to the SPDR S&P MidCap 400 exchange-traded fund should fare well if uncertainty lies ahead and the sector trades in a range, sources said.

The payout at maturity will be par plus double any fund gain, up to a maximum return of 19% to 24%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the shares fall by up to 20% and will be fully exposed to any losses if the fund finishes below the 80% barrier level.

The underlying ETF tracks the price of 400 companies with mid-sized market capitalizations, ranging from $1 billion to $4.4 billion. It has gained 12% year to date. Over the last two years, it posted a 14% positive return.

For Steve Doucette, financial adviser at Proctor Financial, the allocation to the sector makes sense in times of economic uncertainty. In addition, the structure, he said, offered a reasonable balance between risk and rewards.

Asset allocation

"This is not a bad deal. I'm just curious about the fees. We go through the backdoor of these folks when we negotiate a deal with them. If this is a broker-dealer deal, chances are the fees are high," he said.

But the mid-cap exposure made sense to him given the current uncertainty, he said.

"We are asset allocators. This is a generic note with some leverage. We always hold some mid-cap allocation because we don't know what part of the economic cycle we're in. Usually, large-cap takes off toward the end of the cycle while small-caps and mid-caps outperform in the early stages of the recovery," he said.

"Since we don't know where we are, we do have avocations. This might be a reasonable index to pick up some exposure."

The structure, he said, gives an advantage to investors who see the market trading sideways.

"This is the type of notes you can use if you're looking to outperform the index, but only if it trades within a range," he said.

"The hard part is that two years out, nobody really knows what happens.

"They give a 19% to 24% range for the cap. It might help after a selloff like the one we're seeing now. Since you're selling the upside, I imagine that a sudden volatility spike at pricing should reduce the price and allow them to increase the potential cap," he said.

The cap and the downside protection seemed to offer enough range for investors, including for the more cautious ones.

"The structure isn't bad. The two-times upside is a nice thing. On the downside, the 80% barrier is kind of neat as long as you don't blow through that 20%.

"It's nice to have that if the market is going to be range bound. If it is, if it doesn't drop by more than 20%, it's better than a 10% buffer," he said.

He compared the 80% barrier the note offered, giving investors a 20% "soft buffer" with a traditional 10% buffer.

As an example, he said that a 19% price decline in the underlying fund would protect investors from losses while buyers of a note with a 10% buffer would lose 9% of their investment.

"Barriers offer an interesting twist on the downside compared to buffers," he said.

"People tend to prefer buffers but you really need to compare the percentage amount of protection."

Uncertainty ahead

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said he anticipates more volatility in the small and mid cap equity sector looking forward. The structure of the notes however made him feel confident about the downside protection and upside potential.

"If we had this conversation last week, I would feel more optimistic. I'm not super- optimistic on the near-term for small and mid cap equities because of the questions that are coming up on our ability to manage the economic challenges that we have ahead of us," Medeiros said.

"This is a two-year note on a point-to-point. I do believe there will be substantial fluctuations in this asset class over the next two years. There will be more volatility in the sector but I am relatively optimistic this structured note will make you some money. I don't anticipate the asset class will be down more than 20% on a point-to-point basis two years from now," he said.

"If it was a quarterly review or a shorter viewpoint, then I would be more concerned."

Medeiros said that the upside potential was structured for mildly bullish investors. The leverage helps enhance returns for those who are not overly "optimistic," he said.

"We will see appreciation in the mid-cap sector but not a great deal of appreciation.

"I don't find the cap to be too limiting. The cap is fair relative to the buffer," he said.

In general, as investors' focus shifts to the fiscal cliff debate and mounting economic pressures, volatility is likely to rise in all asset classes, he predicted.

"I think there's never been a better time to invest in structured products.

"These notes give you an opportunity to participate in the underlying security while sharing the risk with a bank," he said.

Barclays is the agent.

The notes will price on Nov. 27 and settle on Nov. 30.

The Cusip number is 06741TKD8.

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