UBS’ $6.88 million outperformance jump securities on two baskets seen as speculative bet

By Emma Trincal

New York, Sept. 27 – UBS AG London Branch’s $6,875,000 of 0% outperformance jump securities due Oct. 4, 2023 linked to two baskets of ETFs provide a relative value play for risk-taking investors with the potential for a high digital payout but no downside protection.

The return of the notes is based on the relative performance of two baskets.

The “long basket” consists of the Utilities Select Sector SPDR fund and the Health Care Select Sector SPDR fund, according to a 424B2 filing with the Securities and Exchange Commission.

The “short basket” consists of the Technology Select Sector SPDR fund and the Consumer Discretionary Select Sector SPDR fund.

The funds are equally weighted in each basket.

If the long basket return is greater than or equal to the short basket return, the payout at maturity will be par of $10 plus 15.50%.

If the long basket return is less than the short basket return, the payout at maturity will be equal to the outperformance return, which is the long basket return minus the short basket return. In this case, the payout will be less than par.

Tech rally scenario

Joe Solan, managing partner at 4Sight Advisors LLC, saw some risks.

“It’s interesting. But I don’t know that I would love it,” he said.

“The more beaten down sectors, those in the short basket... if there is a recovery, those are going to bounce back faster. People will be likely to jump into Apple and Amazon.

“Meanwhile, health care and utilities can easily underperform in this scenario.

“You could lose on the strategy if the short basket is doing better.”

The terms “long” and “short” in the prospectus are mere designations of the baskets. They do not refer to the so-called long/short trading strategy.

“Tech names will do better once the Fed is done tightening. It may not happen overnight. They’ll probably have to see what the rate hikes are doing to inflation, their impact on the economy and if there’s a recession. They’ll have to stop at some point,” he said.

“If they start doing 25 basis points hikes instead of 75bps, the market will get the message that the tightening is over. You’ll have a recovery, which makes this strategy very risky because it could very well happen within a one-year timeframe.”

Limited reach

Mark Dueholm, chief fixed-income trader at Landolt Securities, said the deal was not aimed at retail investors.

“That wouldn’t be for us. We don’t do sector bets. You need to have a strong opinion on each of those ETFs. You also have to have a pretty definite view on where the market is going to be next year,” he said.

Any investor considering the notes would want to get a sense of the odds of winning. But such information may be difficult to come by.

“Even though I have no idea of what the odds are, it seems awfully risky. If the short basket is going to outperform the long one by any stretch, you’re going to lose money,” he said.

Dueholm concluded that the customer base for the note was or probably should be limited to sophisticated investors.

“It’s a speculative bet,” he said.

Mixed bag

Steven Kaplan, founder and portfolio manager at True Contrarian Investments, did not like the risk-adjusted return of the notes.

“That’s an odd deal. It’s almost like flipping a coin,” he said.

He examined the basket components.

“The utilities fund wouldn’t be my sector of choice. In fact, I’m short utilities because the sector until very recently was in a bubble. A few weeks ago, it hit its highest price ever. Meanwhile, the insiders, especially the top executives were heavy sellers.”

The Health Care Select Sector ETF was “less extreme,” he said, adding that the sector was “not exactly out of favor” but that its price was “more reasonable.”

The technology ETF, he noted, was still “overpriced” albeit less so than at the end of last year.

Finally, the consumer discretionary fund was “kind of neutral,” he said.

“So, you end up with two neutral components –the health care and the consumer discretionary ETFs –along with a tech fund that’s still overpriced coupled with a utilities sector that’s in a big bubble.

“It’s an odd combination.”

Hazardous outcome

The picks increased the chances of losses, according to this portfolio manager.

“The problem here is you don’t have a clear advantage in any of those selected funds. There is no clear pattern. It’s random. When you pick four ETFs with no obvious pattern to them, the odds are probably 50/50.”

Structured notes he has seen before offered a more favorable distribution of probabilities, he said.

“This one has a 50% chance of losing money. This is the highest chance of losing money I’ve ever seen in a note before. And the payoff is not like 10 times.

“It’s a coin flip.”

UBS Securities LLC is the agent and Morgan Stanley Wealth Management is the dealer.

The notes settled on Tuesday.

The Cusip number is 90289V294.

The fee is 2.25%.

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