Wells Fargo links enhanced notes to S&P 500; generous leverage attractive but risky, adviser says

By Kenneth Lim

Boston, March 5 - Wells Fargo & Co.'s planned enhanced participation notes linked to the S&P 500 index is a highly risky product despite a very generous participation rate, an investment adviser said.

Wells Fargo plans to price zero-coupon enhanced participation securities due April 2011 linked to the S&P 500.

If the index finishes above its initial level, the payout at maturity will be par plus double any gain in the index, subject to a total maximum payout of 133% to 136% of the principal. The cap will be set at pricing.

If the index finishes flat or is at least 85% of the initial level, investors will receive par. Investors will lose 1% for every 1% that the index declines below 85% of its initial level.

Attractive participation rate

The 200% participation rate on the upside is a valuable feature, the adviser said.

"Getting two times of anything on the upside is always good," the adviser said. "The index just has to rise a few percent and you'll get a better return than risk-free investments. As long as the S&P doesn't go above the cap, the leverage and the 15% buffer make this a better alternative compared to an index fund."

Even if the index exceeded the cap, investors will still be able to enjoy a solid return, the adviser added.

"I wouldn't be too concerned about that," the adviser said. "Even if I hit the cap, I'm still getting 33% to 36%, which is a very good return for two years. I'll probably underperform the index, but you can consider that the price of the leverage and the buffer. I limited my upside, but I also had some protection on the downside."

Risky investment

But the adviser cautioned that the product was highly risky.

"The fact that they can give you two-times leverage over two years, that's because the index is so volatile right now," the adviser said. "I don't know many people who are extremely bullish about the market for the next two years. I'm not. The markets could hit bottom, but they might not come back quickly. If there's a gain, it could be just a slight gain. Again, that's where the leverage is valuable. But it's not an insignificant risk. These are depressing times."

The adviser also noted that the credit risk of the issuer was a concern.

"I'm not saying I think Wells Fargo is going to default," the adviser said. "I don't think they will. But there's a lot of uncertainty and concern right now about the banks and how stable they are. I generally don't advise clients to buy structured notes from banks unless they're double A, but I heard today some of the banks could get downgraded, so we're clearly not out of the woods yet. Simply buying a structured note is a bit of a risk right now. The number of banks that are considered safe, it's a very small number and it's not growing."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.