JPMorgan’s $1.54 million autocall leveraged notes on S&P Bank ETF offer timely bet on banks

By Emma Trincal

New York, July 1 – JPMorgan Chase Financial Co. LLC’s $1.54 million of 0% autocallable buffered return enhanced notes due June 28, 2023 linked to the SPDR S&P Bank ETF present an attractive structure for investors whether they hold a bullish or range-bound view on banks. The banking industry also presents timely opportunities in the current macroeconomic environment, advisers said.

The notes will be automatically called at par plus 11% if the ETF closes at or above its initial level on July 8, 2022, according to a 424B2 filing with the Securities and Exchange Commission.

If the ETF finishes at or above its initial level, the payout at maturity will be par plus double the gain of the ETF.

Investors will receive par if the ETF falls by up to 20%.

Otherwise, investors will lose 1% for each 1% decline of the ETF from its initial level.

Three scenarios

“I like this note,” said Steve Doucette, financial adviser at Proctor Financial.

“Bank stocks are making a comeback. If you can capture an 11% premium after one year, that’s a neat return.

“If you’re not called and the ETF goes up, you get a pretty attractive payout at the end with 2 times leverage and no cap.

“Worst-case scenario: it’s down. But you have the 80% level for protection. So, you could in theory outperform the index.”

Strong rally

Perhaps one drawback was the current valuation of the fund, he noted.

“This ETF had a huge run. Since September it doubled in price, at least until the end of March,” he said.

He noted that this period was characterized by a bond sell-off, which pushed up long-term yields as investors became preoccupied by inflation.

Banks tend to lend money over longer durations. A spike in long-term rates is a source of additional revenues for them. As long as short-term interest rates remain reasonably low, the spread between the savings rates banks pay their customers and the rates they earn from lending money will increase. The wider spread will boost their earnings.

Value play

Despite the share price appreciation, Doucette is relatively confident about banks. He sees the industry as a key component of value investing, which he favors at this time.

“The value rotation is happening. This ETF has strongly outperformed the broader market,” he said.

The SPDR S&P Bank ETF has jumped 71% in the past year while the S&P 500 index rose 38%.

The fund offered a more attractive value in December 2018 and March 2020 during the most important recent pullbacks, he noted.

Entry point

“But it started to take a cut early last month, so that’s good. It looks like it’s at a decent entry point,” he said.

The share price is down 8.25% from its 52-week high of March 18.

Given the structure of the note, investors may either have a range-bound or a bullish view on banks. A call in a flat market after one year or a leveraged uncapped return at maturity after a second-year rally would satisfy any one of those two views, he noted.

On the downside, Doucette said he was “comfortable” with the 80% barrier.

“You can never tell. If you get caught in a pullback you get caught. But the 20% protection seems reasonable to me,” he said.

Cutting a deal

Doucette said his interest in the underlying comes from his attraction to value stocks.

“I’m not necessarily bullish on the banks. But since the banks fall into the value camp, I am bullish in that regard.

“Growth has outperformed for 10 years + while value has been lagging. Historically, there’s always that reversion to the mean.”

“Also, if interest rates go up, banks will start doing better.”

“I may want to do this note for a small amount. I wonder if you can put some cash on the advisory platform. It seems to be a broker deal. It would be interesting to find out if you can cut the fee.”

According to the prospectus, the fee is 1.5%.

Interesting deal

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said he liked both the structure and the underlying industry.

“It’s an interesting play,” he said.

“It’s an index fund so it’s well diversified.”

Medeiros also pointed to the role played by interest rates.

“With the potential of rising interest rates, banks may be much more profitable in the future,” he said.

The fund’s share price skyrocketed In March during the bond sell-off.

“This could happen again,” he said.

Investors spooked by inflation during that time pushed the 10-year Treasury to 1.77%, an 85 basis points increase from its level at the beginning of the year.

“If the economy continues to recover, we may see more of this yield rally in the future, which would be positive for the banks’ bottom line,” he said.

“In this scenario, the ETF would probably rally.”

One, not two

Medeiros said he is “optimistic” about the banking industry.

“In this post-pandemic environment, we should see an increase in lending with people buying more homes and cars.

“If the notes don’t get called, you have the opportunity to get 2x and no cap,” he said.

Asked whether he was surprised to see a structure offering enhanced return with no cap over such a short tenor, his answer was “no.”

“It’s a one-year play in my view. I anticipate that you would get called in one year.

“But if it happens, you’re in good shape. You get an 11% call premium. That’s nothing to be ashamed of.

“I think this is a good note. I like it.”

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes settled on Wednesday.

The Cusip number is 48132USM6.

© 2015 Prospect News.
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