CIBC’s $1.22 million leveraged barrier notes on VanEck Semiconductor offer timely bet

By Emma Trincal

New York, Aug. 2 – Canadian Imperial Bank of Commerce’s $1.22 million of 0% market-linked securities – leveraged upside participation to a cap and contingent downside due Aug. 1, 2025 linked to the VanEck Semiconductor ETF, come at a time of government support for the industry and lower entry prices for investors considering the trade, advisers said.

If the ETF finishes positive, the payout at maturity will be par plus 150% of the ETF gain, subject to a maximum payout of par plus 63%, according to a 424B2 filing with the Securities and Exchange Commission.

If the ETF finishes flat or falls up to 30%, the payout at maturity will be par. Otherwise, investors will be fully exposed to the loss.

Terms

“This could be a good play just when the Senate passed a bill last week to boost the semiconductor sector,” said Tom Balcom, founder of 1650 Wealth Management.

“It’s a very volatile asset class. So, you have to ask yourself if the cap is high enough and if the barrier is strong enough.

“I think both are good. The upside is pretty generous. It’s about 20% annualized. On the downside, the 70% barrier should be sufficient over a three-year period.”

Industry outlook

Balcom said he was relatively bullish on the semiconductor industry.

“We had two years of shortage due to Covid, but semiconductor sales can only grow. You need chips for everything from cars to computers and phones. Global demand is going to continue to rise,” he said.

However, future chip shortages if any would have a mixed impact.

“It may increase demand, but it may also negatively impact stock prices,” he said.

Tradeoff

Because his industry outlook was positive, Balcom said the share price may exceed the maximum return.

“There’s a high probability to be capped out at maturity. That doesn’t mean it’s a bad cap. Most people would be happy with high double-digit returns. You just give up some of the upside for the barrier. And 70% is a nice barrier for that length of time,” he said.

Balcom however would not consider the product for his clients.

“I like the note. But I wouldn’t do it,” he said.

“We only use diversified indices or ETFs. This ETF is a sector play...it’s actually a sub-sector play. We typically don’t do that.”

Timing

Jeff Pietsch, founder of Capital Advisors 360, said the deal was being priced at the right time despite geopolitical concerns around Asia.

“The timing is especially good for this note. The ETF is in bear market territory and the Senate just passed an Act that provides $52 billion for U.S. companies producing computer chips,” he said.

He was referring to the Chips and Science Act that passed the Senate on Wednesday and is now waiting to be signed into law by president Joe Biden.

The ETF closed at $237.15 on Tuesday, off 25.6% from its 52-week high of $318.82 of Nov. 22, 2021.

“Both the depressed share price and the support in Congress make it a timely note offering. I would have preferred having a buffer instead of a barrier, but the 25% level is acceptable,” he said.

Cap, cost

The upside was also compelling, he said.

“The 63% cap represents a 17.7% compounded annual return. For a moderate investor, that type of return and downside protection are attractive,” he said.

One caveat was the 2.72% fee for this deal, as disclosed in the prospectus.

“It’s a bit high. A leveraged ETF would probably only charge less than half a percent in expense ratio. On the other hand, you would have the full leveraged downside risk.

“Still, a note charging 83 basis points per annum is a little pricey,” he said.

Taiwan wildcard

The ETF is concentrated around 25 holdings with a large geographic concentration around one Asian country, which happens to be at the center of geopolitical tensions between the United States and China.

The portfolio is overweight in U.S. stocks with 77.75% of the total, according to VanEck website. The second biggest country is Taiwan with an 11.35% weighting.

The 11.35% country weight equals the allocation to Taiwan Semiconductor Manufacturing Co., which is the top holding in the fund.

“One may worry about China invading Taiwan. Such event would blow your barrier quickly, for sure. It’s a concern but I wouldn’t base my investment decision on a catastrophic assumption, or some sort of end-of-the-world scenario,” he said.

“An invasion of Taiwan by China is constantly in the news. But nobody has the ability to predict such event. There’s no evidence that it’s going to happen.

“Unless a serious macro event hits, this is a pretty good deal. I like it.”

Wells Fargo Securities, LLC is the agent.

The notes settled on Monday.

The Cusip number is 13607XAP2.

The fee is 2.72%.

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