RBC’s capped levered market plus notes on Technology Select offer six-month tactical play

By Emma Trincal

New York, Feb. 6 – Royal Bank of Canada’s 0% capped levered market plus notes due Aug. 14, 2019 linked to the Technology Select Sector SPDR fund come at the right time for short-term bulls eager to monetize the current rebound in tech stocks after a severe plunge in December.

The payout at maturity will be par plus 2 times any fund gain, capped at par plus 10.76%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will lose 1% for each 1% fund decline below the initial level.

Bouncing back

“It’s a good opportunity,” a market participant said.

“This speaks to the fact that tech was embattled at the end of last year and now the major tech stocks are up. Most of the big names in this fund were wiped out. They now have traded up,” a market participant said.

To be sure, the share price of Apple, Inc. the second largest constituent of the ETF, has jumped 23% from its low at the beginning of the year. Microsoft Corp., the top holding, has gained 13% since its bottom on Christmas Eve. Other technology-related names rose as well. Facebook, Inc. is up 37% from its December low.

“The State of the Union speech seemed to indicate that we may be closer to a resolution of the dispute with China,” he said.

Short-term leverage

“A lot of the concerns about trade and China have been priced in already.

“This is a six-month deal. You’re playing for a bounce. It’s more trading-oriented than investment-oriented.

“But if you think we’re likely to reach an agreement with China, this is a good way to play it.”

Even with the lack of protection and a cap, the structure caught his attention for its short duration.

“Six months is unusual for a leveraged deal. It’s a good cap. The pricing is intriguing,” he said.

The underlying fund has strongly bounced back up as well. Since its bottom on Dec. 24, which saw the share price drop 24% from its October high, the stock has regained 19%.

Fast track

This type of fast uptrend can be a concern, according to Paul Weisbruch, in charge of ETF/options sales and trading at Esposito Global.

“I don’t have a problem with the design of the notes. But given the big move we just had inside of a month, I wonder how much more potential upside move we can get,” he said.

“We had a bad fourth quarter. But we recovered a little too quickly. I don’t see us revisiting the December lows. But I don’t see the market making new highs.”

The structure with its cap and asymetrical leverage offered an advantage over an equivalent exposure through a leveraged ETF however.

“If you’re bullish and your timing is wrong, if your direction is wrong, you suffer greatly with an ETF,” he said.

“At least with this product you don’t have to worry about the downside leverage.”

The notes would fit a mildly bullish view on the sector, he added.

“It may be a good bet if you see the market trading range bound. I certainly think we’re going to kind of trade sideways.”

Not so common

Aside from its structure and embedded market view, the deal offered another interesting characteristic: the underlying itself.

Data compiled by Prospect News showed that the Technology Select Sector SPDR fund is not often used to access the sector via a structured note.

Last year, for instance, only six deals based on this fund (as the sole underlier) hit the market for a modest total of $20 million.

It is more frequent to see this fund added to other sector ETFs, such as energy or biotechnology funds.

How people play

Investors instead have shown a greater deal of interest in baskets of technology stocks. In a similar way, they have been using worst-of payouts with two or three tech stocks.

Sometimes the basket is actively managed. An example is Canadian Imperial Bank of Commerce, which priced deals in August and October based on Raymond James Technology Top Selections. The basket consists of 16 technology stocks selected by Raymond James & Associates, Inc.

FANG stocks have been in high demand as well. The use the four popular names – Facebook, Amazon, Netflix and Google’s parent Alphabet – has been one of the most prevalent trades last year.

For the most bullish or for investors seeking high-yield, notes linked to single tech names have been well received. There were 172 deals on Apple alone last year amounting to $742 million, according to the data.

RBC Capital Markets, LLC is the underwriter with JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC as placement agents.

The notes will price on Friday.

The Cusip number is 78013XYT9.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.