JPMorgan’s uncapped leveraged notes on green, solar ETFs offer access to popular themes

By Emma Trincal

New York, Feb. 23 – J.P. Morgan Chase Financial Co. LLC’s 0% uncapped accelerated barrier notes due March 5, 2026 linked to the lesser performing of the First Trust Nasdaq Clean Edge Green Energy index fund and the Invesco Solar exchange-traded fund provide leveraged exposure to two popular ETFs with attractive terms, advisers said. But the five-year holding period may be a drawback in this current bull market.

The payout at maturity will be par plus 1.2 times any gain in the lesser performing fund, according to a 424B2 filing with the Securities and Exchange Commission.

If either ETF falls but neither falls by more than 40%, the payout will be par.

If the lesser performing ETF falls by more than 40%, investors will be fully exposed to the decline of that ETF from its initial level.

Toppish market

Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, was concerned about the timing of the investment.

“Things like clean energy are certainly good long-term trends. But we’re in the bubble-ish part, heading towards the tail end of the bull market,” he said.

“Clean energy, alternative energy are very trendy themes. People have been buying those two ETFs a lot. I would be more hesitant to do that right now. It’s a little risky to invest in trendy things, which are trading towards the top because those are the assets that tend to move the other way around first.”

He said the uncapped upside and barrier offered value. But these terms were not enough.

“I think the 40% protection is nice. But if we’re in a market like in the late 1990s, I would not want to invest in a note that’s not buffered. And the risk is definitely higher with fast-growing stocks,” he said.

High-flyers

To be sure, both funds have soared as investors are betting on the new administration’s energy plans. But the funds have also benefited from the recovery rally, which followed the market crash in March.

The First Trust Nasdaq Clean Edge Green Energy index fund has gained 358% since its low of March while the Invesco Solar ETF climbed 373%. The S&P 500 index in comparison rose 77% during the same period.

“We don’t know when the bull market is going to stop. It could be next month or by the end of this year, or maybe next year. It will definitely be within the next five years,” said Chisholm.

“So, the issue for me is the timing of this five-year note.”

Terms

Jonathan Tiemann, president of Tiemann Investment Advisors, was intrigued by the pricing of terms he found relatively attractive.

“It’s very interesting. The structure isn’t bad at all. I wonder how they were able to put it together,” he said.

“It’s not the dividends.”

The solar fund pays “hardly any dividend,” he noted. Its yield is 0.08%. The Clean Edge Green Energy ETF has a 0.27% dividend yield.

“The protection is a cliff at 40% down. But 40% is not bad. And there’s the leverage. And there’s the uncapped upside,” he said.

Pricing

“I guess you can pay for that with the worst-of although the two funds are pretty correlated,” he said.

The five-year coefficient of correlation between the two underlying funds is 0.83.

“I think the way they can pay for the protection and the leverage is by giving you a very long-term exposure and also by structuring the payoff as a worst-of. Even though those two are highly correlated, they will diverge at some point.

“Five years is an awfully long time for energy. Energy is evolving. We could see for instance the development of advanced nuclear power. The ETFs may be subject to market dislocations or technology disruptions which could impede the returns even though the underlying funds seem highly correlated.”

The notes are guaranteed by J.P. Morgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes will price on March 1.

The Cusip number is 48132R6W5.

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