Barclays’ SuperTrack notes linked to Vanguard FTSE All-World provide global small-cap exposure

By Emma Trincal

New York, April 4 – Barclays Bank plc’s 0% SuperTrack notes due April 17, 2024 linked to the Vanguard FTSE All-World ex-US Small-Cap exchange-traded fund bring more diversity in an international equity portfolio, sources said. But the terms for a five-year tenor disappoint.

The payout at maturity will be par plus 1.587 times any gain in the fund, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will lose 1% for each 1% decline.

Five years and no cap

“It’s amazing that you would get five years out without more leverage,” said Steve Doucette, financial adviser at Proctor Financial.

“I can’t imagine you couldn’t increase the leverage or put a downside protection or even both.

“How [much] would it cost to put a 5% or 10% buffer just in case you’re wrong?

“It’s a small-cap underlying. It’s got to have volatility to it.”

While it’s hard to compare notes from different issuers and underliers, a quick look at five-year leveraged products that have priced in the first quarter appeared to validate his point.

All five-year leveraged notes tied to the S&P 500 for instance have carried full downside protection or either a buffer or a barrier, according to data compiled by Prospect News for the period. In other words, none exposed investors to the full downside risk.

And those deals were also largely uncapped. Out of the 48 offerings that fell into this category, only two had a cap, but those two featured 95% principal protection and a 15% buffer, respectively.

Last week, Barclays itself priced $20 million of five-year trigger gears tied to the S&P 500 with 1.4525 times leverage, no cap and a 75% barrier. GS Finance Corp. on the same day did a similar uncapped leveraged deal (five-year tenor, S&P 500 and 75% downside barrier) with 1.59 times leverage.

Diversified mix

Doucette, however, said he liked the underlying fund.

“It’s a pure bullish outlook. Five years out ... you’re going after small-cap in a pretty aggressive global index. I kind of like that,” he said.

The Vanguard FTSE All-World ex-US Small-Cap ETF tracks the performance of the FTSE Global Small Cap ex US index. The fund diversifies across developed and emerging non-U.S. small-cap equity markets around the world.

The fund is up 12% for the year. Its performance has been flat though over the past five years.

“I do like the fund. Small-caps have historically outperformed large-cap over the long term. There’s a nice mix of emerging markets and developed countries over the world,” said Doucette.

The fund has 3,624 constituents.

“I like this index also because it’s a very broad small-cap index. It’s got emerging markets, which is likely to outperform.”

Emerging markets make for 21% of the fund’s portfolio. Europe represents 36% and the Pacific region, 29%. The rest is in Canada.

“It’s a nice mix for an international allocation, and it’s a way to capture the leverage,” he said.

“I would just restructure it a little bit. Just add some leverage. The downside protection is not that crucial for this note as it presents itself as aggressively bullish.

“I would look for it to be the horsepower in the portfolio.”

A big bet

Jeff Pietsch, head of capital markets at the Institute for Wealth Management, also showed surprise regarding the terms.

“You’re buying the index and a call in a pure bullish play. Overseas stocks have been underperforming the U.S., so you’re making a bet that there will be a reversion in relative value. But it’s a big bet in this late part of the market cycle,” he said.

“I’d want some protection, some barrier ... something down there. But there’s nothing there.”

The underlying ETF has “a low expense ratio and a nice 2.55% dividend yield,” he noted.

Noteholders are not entitled to receive any dividends, however.

The expense ratio of the ETF is 0.12%.

Pick and choose

The fund allocates across a wide variety of international stocks. Pietsch, however, likes to be more specific when it comes to the international bucket of his firm’s portfolio.

He is not very bullish on Europe, for instance.

“We reduced our exposure there because of the uncertainties around Brexit and the impact it has on the German economy as well as the entire euro zone,” he said.

Emerging markets countries should also be carefully selected.

“We’re pretty pro-emerging markets, but you have to be country-specific. Why wouldn’t you be looking to where you expect the most growth? We like Brazil and India, for instance. But we don’t embrace all emerging markets as a whole.”

Small-cap edge

In general, getting global equity exposure does not necessarily require buying a portfolio of foreign stocks.

“The old ways no longer apply because the large companies of the S&P generate a large percentage of their sales outside of the U.S., so you can buy the S&P and get global exposure rather easily. You don’t need to go outside of the U.S.,” he said.

It was obviously different with the notes as the underlying consists of small-cap stocks.

“In this case you get access to this small-cap global market. It makes a little bit more sense.”

Barclays is the agent.

The notes will price on April 12.

The Cusip number is 06747MLR5.

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