Barclays’ trigger performance notes linked to Vanguard FTSE EM ETF created to outperform fund

By Emma Trincal

New York, May 6 – Barclays Bank plc’s 0% trigger performance securities due May 29, 2020 linked to the Vanguard FTSE Emerging Markets exchange-traded fund offer uncapped leveraged gains, which should appeal to bulls with moderate growth expectations hoping to outperform the underlying fund, a buysider said.

If the ETF return is positive, the payout at maturity will be par of $10 plus 140% to 150% of the ETF return. The exact participation rate will be set at pricing, according to an FWP filing with the Securities and Exchange Commission.

If the ETF return is zero or negative and the ETF’s final share price is greater than or equal to the trigger price, 75% of the initial share price, the payout will be par.

If the final share price is less than the trigger price, investors will be fully exposed to the decline in the ETF from its initial share price.

“If you’re not very bullish, you catch up with the leverage; and if you don’t expect a doomsday scenario, at least you have some degree of downside protection,” a financial adviser said.

Headwinds

“Emerging markets after good returns in 2012 did not perform well last year and in 2013. Things are much better so far this year, but I’m still wary about this asset class,” he said.

The Vanguard FTSE Emerging Markets ETF has gained 8.3% so far this year.

The other popular emerging markets fund, the iShares MSCI Emerging Markets ETF, is up 8%.

In comparison, U.S. equities as measured by the S&P 500 index have recorded a 1% gain this year to date.

“A lot of the improved returns in emerging markets has to do with China,” this adviser added.

The iShares FTSE/Xinhua China 25 ETF has risen 18.5% this year and more than 40% over the past 12 months.

“But when you have that type of run, how much higher does the bull market have to go from that point?”

This adviser said he is not overly bullish on emerging markets because of several risk factors.

“Emerging markets in general and China especially are facing a series of challenges,” he said.

“First, when the Fed lifts the rates, emerging markets will get hit because they have obligations to pay in U.S. dollars.

“Second, when rates go up in the U.S., capital as a result will flow into the U.S., leaving emerging markets with less funds to finance their deficits.”

Currency war

But the worst challenge comes from Europe and Japan, as they “keep on” depreciating their currency, he said.

“China and other emerging markets face the competitive pressure from Europe and Japan to export their goods. And emerging market countries rely a lot on exports.

“China in particular is in a conundrum. They can’t really depreciate their currency because it’s pegged to the dollar.

“But even if they did, it would hurt them even more because they have a lot of dollar-denominated debt.”

The improved performance of emerging market benchmarks this year is not easy to explain, he said, especially with the dollar appreciation, although the dollar began to weaken in the past two weeks.

“I assume the rally in emerging market equity has a lot to do with China and the fact that big funds do country rotation and invest in what’s cheap,” he said.

A good fit

Overall, this adviser said that he is “not very bullish” on emerging markets, keeping only a “very small” allocation to this asset class.

“Does it mean I see a disaster looming? No. I don’t,” he said.

“For an investor like me, the notes would actually be a good fit. For someone who thinks emerging markets won’t fall off the cliff but that they may fall, this product works for that view.

“But I wouldn’t use it because I’m not a fan of structured notes. I don’t invest in them because of the fees, the illiquidity and the credit risk.”

Broad exposure

The Vanguard FTSE Emerging Markets ETF since 2013 has transitioned from tracking the MSCI Emerging Markets index to the FTSE Emerging Markets index, according to the prospectus.

One main difference between the two indexes is the elimination of South Korea from the FTSE Emerging Markets index. FTSE Group, the index provider, decided in 2009 to reclassify South Korea as a developed country.

The ETF is diversified across 21 countries. China represents the largest component with a 26.2% weighting, followed by Taiwan (14.5%) and India (12.2%), according to the Vanguard website.

“I would pass on that note,” an investment adviser said.

“It all depends on the stocks in the index and the countries we want to get exposure to. This fund is too broad for us. We are more specific in the stocks, the sectors we pick as well as the countries.”

UBS Financial Services Inc. and Barclays are the agents.

The notes are expected to price May 26 and settle May 29.

The Cusip number is 06743P350.

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