Citi’s trigger notes on iShares U.S. Home Construction ETF offer levered gains on the downside

By Emma Trincal

New York, May 25 – Citigroup Global Markets Holdings Inc.’s 0% dual directional trigger PLUS due June 4, 2026 linked to the iShares U.S. Home Construction ETF offer a rarely used feature in a dual directional payout – the leveraging of the gains available within the absolute return range.

If the ETF return is positive, the payout at maturity will be par plus two times the ETF return, subject to a maximum return of par plus 34%, according to a 424B2 filing with the Securities and Exchange Commission.

If the ETF return is negative but above its 65% trigger level, the payout will be par plus 1.5 times the absolute value of the return.

Otherwise, investors will be exposed to the decline from the initial price.

Deep barrier

Scott Cramer, president of Cramer & Rauchegger, Inc., found the terms attractive but not the underlying.

“Homebuilders have done well but I’m not bullish on the sector,” he said.

“However, if you’re bullish, it seems like a good bet. The 34% cap gives you a good potential return, and if you’re wrong, you get a lot of protection in addition to the leveraged absolute return.”

He noticed two attractive components of the absolute return.

“I haven’t seen any leverage on the absolute return before. Also, the ranges that I’ve seen are usually much narrower,” he said.

Because the barrier is so wide, investors can earn up to 52.5% from a market decline, or 35% times the 1.5 leverage multiple.

On the upside, the top gain is 34%.

Margin of errors

“It’s fair to say that the notes have a slightly bearish bias,” he said.

“But you’re not taking a directional bet one way or the other. It’s a dual directional note. It can go either way.

“In both market directions, you have a significant margin of error.

“The fundamentals and the technicals of the structure fit a bullish narrative because you get a lot of protection. It also fits a bearish narrative.

“You could take either side.”

Risky sector

Cramer was somewhat surprised by the quality of the structure.

“It looks really good. Usually when they give you these kinds of terms something is wrong. They still have to hedge these things out,” he said.

Despite the appealing structure, this adviser would not consider the notes.

“I would go find something else simply because I’m not bullish on homebuilders,” he said.

“They had a huge run, which is strange to me.”

Cramer said the sector remained at risk.

“There is a lot of home inventories because people can’t afford to move,” he said.

“Mortgage rates at 6.5% to 7% are high. Inflation is not going down fast. There’s still a growing risk of a recession.

“The terms of the notes are good. But I wouldn’t take a bet on homebuilders.”

Taking both sides

Jeff Pietsch, founder of Capital Advisors 360, also noted the particularity of leveraging the absolute return component.

“I’ve seen one-to-one absolute return, not the leverage,” he said.

The outlook on the sector was not clear cut, which made the notes suitable for a variety of investors.

“The home construction sector has recovered a good portion of its bear market losses. It has rallied a lot. Technically it looks strong,” he said.

The ETF set an all-time high on Dec. 31 2021 at $83.43. It then dropped more than 42% to a low of $48.02 on June 17. From that point on, the share price skyrocketed by 54% but still remains 11.4% off its high.

The share price closed at $73.96 on Thursday.

“From an economic standpoint, the picture on new home constructions is not that clear, which makes this note intriguing,” he said.

“On the one hand, we have an undersupplied market nationwide. On the other hand, mortgage rates are high.

“So, the dual directional structure of the notes sort of matches this mixed outlook.

“If you want to play the bullish side, you can do it. You can get 10% compounded per year.

“If your bullish bet is wrong, you have the margin of safety with 35% of downside protection.”

At Thursday’s closing price, the barrier threshold would be $48.

“To get to that barrier level, you would have to go all the way down to the recent bear market lows. That would be a pretty significant drop,” he said.

The bearish view can be supported by the recession risks. But it’s not the only possible scenario, he noted.

“We could have a hard landing or a soft landing. Either way, you can make money on this note. It’s pretty interesting.

“It can address concerns for both bulls and bears,” he said.

“I might actually consider it.”

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the agent. Morgan Stanley Wealth Management is the dealer.

The notes will price on May 31 and settle on June 5.

The Cusip number is 17331HZE9.

© 2015 Prospect News.
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