JPMorgan’s contingent yield autocalls on gold miners ETFs offer timely, contrarian income play

By Emma Trincal

New York Nov. 5 – JPMorgan Chase Financial Co. LLC’s autocallable contingent interest notes due Nov. 14, 2024 linked to the least performing of the VanEck Vectors Gold Miners ETF and the VanEck Vectors Junior Gold Miners ETF may offer a margin of safety and competitive income to investors willing to bet on an out-of-favor asset class, said Steven Jon Kaplan, founder and portfolio manager at True Contrarian Investments.

The notes will pay a contingent monthly coupon at an annual rate of 10% if each ETF closes at or above its interest barrier level, 70% of its initial level, on the review date for that period, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par plus the contingent coupon if each ETF closes at or above its initial level on any monthly review date after three months.

The payout at maturity will be par plus the contingent coupon if each ETF closes at or above its 70% trigger value. Otherwise, investors will lose 1% for every 1% that the worst performer finishes below its initial level.

The VanEck Vectors Gold Miners ETF and the VanEck Vectors Junior Gold Miners ETF are listed on the NYSE Arca under the tickers – “GDX” and “GDXJ,” respectively.

“GDXJ and GDX have a very strong positive correlation. That’s a good thing,” said Kaplan, who said he liked the notes for income purposes.

“The 10% annualized note is favorable, and the barrier provides some downside protection. I like most of the features of the note. The chances of making money with it seem high,” he said.

Gold miners

The choice of the two underlying ETFs was also favorable, he said.

“Unlike most assets in the U.S. markets, especially big tech, those two funds are not topping out.

“It’s always refreshing to see a structured note linked to an asset or a security that’s out of favor. We should see more of those,” he said.

Both ETFs replicate the returns of gold mining companies’ stocks.

The VanEck Vectors Gold Miners is a large-cap equity fund. Its top two holding are Newmont Corp. and Barrick Gold Corp., which have market caps of $43.95 billion and $33.11 billion, respectively. In contrast, the “Junior” ETF focuses on small and mid-cap miners.

Depressed levels

“GDXJ and GDX topped in August of last year, hitting their highest level in seven and a half years. But even then, they were still well below their all-time highs of 2011,” he said.

While the ETFs have begun to slightly recover since early last month, they remain approximately 30% off their high of August 2020.

“Obviously, they both could be up a lot more three years from now,” he said.

Investors, as a result, need to be comfortable with the 10% cap. If the goal is income, they should be.

“This is not a replacement for owning the shares. It’s more of a conservative strategy to play the sector,” he said.

Learning from the past

Kaplan said he is bullish on the ETFs based on the observation of repeated patterns seen in past market cycles.

“There is a long-established trend seen many times before.... It shows that once large-cap growth share prices fall, investors move into gold stocks,” he said.

The portfolio manager said he observed this pattern after the dot.com bubble burst in 2000, which led to a rally in gold for the following three years. The same happened between 1973 and 1975 after the market plunged. In the same vein, the ETFs topped out in 2011 three years after the financial crisis.

In all those examples, stocks of gold mining companies recovered from low levels and rallied within a similar period of three years, he said.

Rotation to value

Another bullish factor behind a potential rebound of the two ETFs is investors’ interest in gold and gold-related assets as a hedge.

“People perceive gold as a hedge against inflation. It’s really a misconception but it can push prices higher. In reality, gold is more of a hedge against stock market crashes and recessions,” he said.

During market downturns, investors want to diversify away from the “hot” stocks.

“Large-cap stocks keep on making new highs. But a reversal is next. I expect those overvalued stocks to collapse.

“People always look for balance. They switch from beaten up sectors to sectors where they expect better returns.”

Gold stocks, which have underperformed, should benefit from a rotation from growth to value, he explained.

“Every time large-cap growth stocks get hit, people reallocate to gold. It’s always been like that. It happened in 1929, in 1971, in 2000,” he said.

Kaplan expects the same scenario to happen again. The three-year investment horizon of the notes is in line with past cycles, he said.

But of course, the duration of the notes could be much shorter.

Autocall

“Chances are you’re going to get called away, perhaps as early as three months from now. Whether it’s a positive or a negative outcome depends on your strategy,” he said.

“Certainly, you won’t participate in the recovery. If there’s a bull market, you’ll miss it.

“But again, this is not a substitute for owning the shares. If you’re bullish, you should be long the ETFs.

“This is just an income strategy, and I think the terms and the timing are reasonable.

“A cumulative coupon is the only thing I see that could have made the product more attractive,” he said.

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes will price on Nov. 8 and settle on Nov. 12.

The Cusip number is 48132YPF6.

The fee will be not more than 0.7%.

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