Barclays’ $1.75 million notes on S&P Equal Weight index reduces tech-heavy exposure

By Emma Trincal

New York, May 15 – Barclays Bank plc’s $1.75 million of 0% buffered SuperTrack notes due Nov. 8, 2024 linked to the S&P 500 Equal Weight index give investors a more balanced exposure to the S&P 500 index by adopting an equal weighting methodology, which removes the S&P 500 index’s heavy weight in the technology sector, advisers said.

The payout at maturity will be par plus 200% of any index gain, up to a maximum payout of par plus 16%, according to a 424B2 filed with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 10% and will lose 1% for each 1% decline beyond 10%.

Less concentration

Carl Kunhardt, wealth adviser at Quest Capital Management, said he liked the notes, in particular the underlying.

“First, it’s a core position. Before evaluating a note, I first need to know if it has a place in my portfolio. The S&P Equal Weight index definitely belongs to my large-cap bucket,” he said.

This adviser said he preferred the equal-weight version of the S&P to the market-cap benchmark.

One reason was the overall concentration of the S&P 500 index on a few stocks. For instance, the first 10 names in the S&P 500 index’s portfolio show a 30% weight, he noted.

“That’s 10 companies out of 500 making for 30% of the index. The big ones are overrepresented,” he said.

Similarly, the top 50 holdings – or 10% of the number of components – accounted for 55% of the total weight.

Such concentration was the result of the large market capitalization of the technology stocks, which top the S&P 500 index.

“It’s not a secret that the S&P is heavily weighted towards a few tech behemoths,” he said.

Big tech

The top five stocks in the S&P 500 – Apple Inc., Microsoft Corp., Amazon.com, Inc., Alphabet Inc. and Nvidia Corp. – are technology or communications services stocks. Combined they make up 23% of the index.

“I expect the equally weighted version of the index to outperform the index market-cap weighted index because the mega-cap stocks in the S&P trounce value and over the long term, value tends to win over growth,” he said.

“Stocks with reasonable valuations, strong cash-flow, high profitability, and robust dividend growth usually outperform momentum and growth.”

Terms

Kunhardt said he also liked the structure of the note.

“I’m comfortable with the cap. 16% over 18 months, that’s about 10.5% a year compounded. That return exceeds my expectations, which are in the 8% to 10% range,” he said.

The 2x leveraged exposure increased the odds of achieving the 16% return, he added.

Kunhardt also liked the 10% buffer for the downside protection and the alpha it will generate compared to a long position in the index fund.

“This note is hitting all the boxes I need to check. It works from an asset allocation standpoint, from a macro-outlook standpoint. It works on the return side and on the risk side.”

Not the ideal index

Dasale Arachi, head of U.K. distribution at Hilbert Investment Solutions in London, did not see the use of the equally weighted index as more beneficial to investors.

“The equally weighted version of the index may slightly diminish your return given that it is less volatile than the S&P,” he said.

“An equally weighted index would probably not outperform its cap-weighted counterpart when the larger tech names perform well.

“We had a recent example with the FTSE 100 index, which is heavily weighted towards energy. As the war in Ukraine and energy crisis in Europe caused the U.K. energy sector to perform well, the equally weighted version of the FTSE 100 underperformed the benchmark due to having less exposure to the energy companies.

“So, I think the use of the equally weighted version of the S&P is not the preferred choice.”

Autocall preferred

Arachi also questioned the use of leverage as the most adequate payoff.

“Participation notes require some level of growth. The market is uncertain. It may be down, or range bound,” he said.

“I would be much more comfortable with a vanilla autocall, or a Phoenix-type of autocall, which gives you several opportunities to get paid a coupon even in a declining market. You don’t have to wait for the notes to mature in order to get paid as is the case with a participation note or a digital.

“This leveraged note may be suitable for some bullish clients. But I would be more comfortable recommending an autocall in this uncertain market.”

Barclays is the agent.

The notes settled on Friday.

The Cusip number is 06745M6V5.

The fee is 1.95%.

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