CIBC’s market-linked securities on biotech ETF show low cap for bulls, advisers say

By Emma Trincal

New York, July 16 – Canadian Imperial Bank of Commerce’s 0% leveraged capped notes with a buffer due Jan. 23, 2023 linked to the SPDR S&P Biotech exchange-traded fund are one in a series of recent deals on this ETF designed to tap into the renewed interest in the sector due to the pandemic.

As pharmaceutical companies are researching new drugs and ramping up vaccine trials against Covid-19, the trend has turned bullish for biotech stocks.

The payout at maturity for the CIBC notes will be par plus 125% of any ETF gain up to a maximum return of 25% to 30% to be set at pricing, according to an FWP.

Investors will receive par if the index falls by up to 15% and will lose 1% for every 1% decline beyond 15%.

“This is one where you really, really have to do your due diligence,” said Steve Doucette, financial adviser at Proctor Financial.

“This thing has gone up like crazy because of the hopes of finding a vaccine.

“But which one will be the winner? “One of these guys is going to win. All the other might lose.

“That’s why you’d like a little buffer.”

Assessing value, sentiment

Potential buyers of the notes should be aware of their investment bias.

“Do you play value or momentum? It’s a tough one. Speculation has inflated the value of the shares. But how do you value hope? Who knows if it won’t go up much higher?”

“It depends on what you really believe.”

Although imposing a maximum return was necessary to pay for the leverage and the buffer, Doucette struggled with the cap.

Assuming a cap set at the midpoint of the range at 27.5%, the two-and-a-half year note with 1.25x upside leverage gives investors a cap of 10.2% on a compounded annualized basis.

“Do you really want to cap yourself? That’s the biggest question,” he said.

“This might be the biggest outperforming asset class. It’s nice to have a buffer but the cap may be too low.”

Top components

The excitement around a new Covid-19 vaccine has indeed caused the price of this ETF to soar. In less than four months, from its three-year low in March 18 to its all-time high on July 13, it has gained 88%.

Several pharmaceutical companies among the top 10 holdings of the fund are involved at various stages in clinical trials for Covid-19 vaccines.

The most popular one is Moderna Inc. whose stock price jumped 16% on Tuesday after the company announced that its vaccine produced neutralizing antibodies in all 45 patients in its early stage human trial.

Other vaccine-makers among the top 10 are Novavax, Inc., Inovio Pharmaceuticals Inc. and Emergent BioSolutions Inc.

Riding the bull

Doucette said he prefers to allocate across broadly diversified equity indexes rather than betting on sectors.

“I don’t do sectors but if I were going to bet on biotech, I would first do my due diligence. If it made sense, I may go all in and run the risk on the downside,” he said.

“I’d give up the buffer to take away that cap and increase the leverage.

“I’d have to do a little bit more research and this really depends on what your risk appetite is.

“But this is an index that has been running through the roof.

“I’m not sure you want to cap it at this point.”

Cap

Matt Medeiros, president, and chief executive officer at the Institute for Wealth Management, also pointed to the cap as a potential drawback.

“My only hesitation right there is the limited upside,” he said.

“Biotech has historically been a very volatile sector.

“There’s been a lot on interest in the space lately as companies are trying to find a cure and a vaccine for the pandemic.

“This is what has been driving bulls in this sector.”

Medeiros said he liked the upside leverage on the strategy.

“I’m just a little hesitant on the cap.

“I would prefer a higher cap, but it really depends on your personal view.

“If you are bullish on this sector, you’re not going to be pleased with the cap.”

“If I was looking to make a safer trade in this sector, the cap as it is in conjunction with the buffer seems like a good way to make this type of allocation.”

He brought up the fee, which according to the prospectus is 3.15%.

“Investors should be cognizant of the fee both from the issuer and the ETF.”

Increasing demand

The issuance volume of notes solely linked to the SPDR S&P Biotech ETF so far this year is $27.5 million in 13 deals, according to data compiled by Prospect News.

One deal priced in February, two in April and two in May.

The pace accelerated last month with seven deals in June, including a $15.38 million autocallable offering issued by Barclays Bank plc and distributed by BofA Securities, Inc. CIBC plans a similar deal for the end of the month also within BofA’s distribution channel.

So far this month, only UBS priced a deal for $500,000 (phoenix autocallables). BNP Paribas was set to issue another one this week.

Wells Fargo Securities LLC is the agent.

The notes (Cusip:13605WZQ7) will price Friday and settle July 22.

© 2015 Prospect News.
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