UBS’ $11 million autocalls on Biotech ETF look defensive due to value, buffer, advisers say

By Emma Trincal

New York, Feb. 16 – UBS AG, London Branch’s $11 million of phoenix autocallable notes with memory interest due Feb. 13, 2025 linked to SPDR S&P Biotech ETF offered an attractive risk-adjusted return, according to advisers, who pointed to the single asset exposure, the large buffer size, and the underlying’s value.

If the ETF closes at or above the coupon barrier level, 80% of the initial level, on a monthly observation date, the notes will pay a contingent coupon for that month at an annualized rate of 14.00004%, plus any previously unpaid contingent coupon payments, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par if the shares close at or above the initial share price on any observation date other than the final date.

The payout at maturity will be par unless the ETF finishes below the buffer level, in which case investors will lose 1.25% for every 1% that the ETF declines beyond 20%.

Playing solo

“I like that it’s not a worst-of. It’s much easier to understand and analyze your return expectations when you have a note tied to a single underlier,” said Matt Medeiros, president and chief executive of the Institute for Wealth Management.

Medeiros in general said he tries to avoid worst-of payouts.

“Evaluating your investment with a worst-of is challenging. You have to analyze multiple components and their correlations to one another. You have to consider each individual underlier, incorporate your outlook for each of them and assess the probabilities of return for each one.”

Lagging the market

Sector ETFs may be more volatile than broad-based indexes. But such risk in some cases may be offset by the single asset exposure, he said.

In addition, Medeiros had a positive outlook on the underlying ETF.

“Biotech stocks have not participated in the S&P rally we had last year. The sector could be poised to have a nice rebound in 2024,” he said.

This adviser said the 20% buffer was attractive even with the gearing.

“It’s a nice size for a buffer especially on a one-year note,” he said. “It would take a pretty dramatic shift in price to breach that level.”

He explained why.

“I feel relatively comfortable about the downside risk. The buffer is one factor. But it’s also because this ETF is not overpriced as reflected by its low P/E.”

The price-per-earnings ratio of the ETF is 6.74.

Risk reward

“I also see many opportunities coming up this year due to the stronger biotech IPO market. There have been some changes recently allowing the approval of new drugs to be expedited. Quicker approvals could pave the way for more consolidation, making the industry stronger,” he said.

The benefits of the structure and the embedded investment theme offered a compelling combination.

“The probabilities of getting paid are pretty good given the 20% buffered protection,” he said.

“I also like the memory a lot. You’re more likely to maximize your income since you can get paid later for what you missed earlier.

“I think the risk is worth taking.”

Good value

A financial adviser said the valuation of the underlying was compelling.

“The deal offers positive features like the memory coupon, which I always like. But the important aspect is that this ETF is not overvalued like the rest of the market,” he said.

The ETF was volatile, but “not more than many other sectors,” he added, noting that the implied volatility of the SPDR S&P Biotech ETF was currently in the “low 30s.”

A look at a chart revealed how much the security fell from its peak of February 2021.

“That’s the main advantage here. It has come down dramatically from the top,” he said.

The share price at that time peaked at around $175. On Friday, the ETF closed at $93.13.

When the notes priced, the closing price was even lower, at $88.07, setting the buffer threshold at $70.46.

“You’re buying it at a bargain,” he said.

“The 20% buffer is good to have. But the low valuation is just as important. The price has already given up half of the gains of three years ago.”

Good entry

This adviser then looked at the one-year low, which was $63.80 on Oct. 31.

“A price can always revisit former highs and lows. To fall back to the October low would be a drop of more than 20%, so yes you would lose money. In fact, from the initial price of the note, it would be a drop of 28%. Could it drop that much? Everything is possible, but it would be a big drop. A year from now, there’s a fairly low probability that it would happen because the fund is not overpriced,” he said.

In summary, this adviser said the terms of the notes, such as the buffer and the memory coupon, were favorable to investors; but the trade itself was the most compelling.

“You have a great margin of safety. It really reduces the chances of losing money,” he said.

UBS Investment Bank is the underwriter. JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC are the agents.

The notes settled on Feb. 13.

The Cusip number is 90279WY99.

The fee is 0.1%.

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