Wells Fargo links CD to S&P 500; simple structure draws moderately upbeat retail buyers, adviser says

By Kenneth Lim

Boston, Feb. 2 - Wells Fargo Bank, NA opened its 2009 structured products calendar with a certificate of deposit linked to the S&P 500 index.

The product has a straightforward structure that should appeal to investors who are cautiously optimistic about the equity markets in the next few years, an investment adviser said.

Wells Fargo plans to price 0% barrier return certificates of deposit due Aug. 31, 2012 linked to the S&P 500. Morgan Stanley & Co. Inc. is the distributor.

At maturity, the CDs will pay the principal plus any gain in the underlying index, provided that the index never closes above 145% to 150% of its initial level during the life of the CDs. If that threshold has been breached, investors will receive their principal. Investors will receive at least their principal.

The exact threshold level will be set at pricing.

This is the first product this year by Wells Fargo, which has generally not been a major issuer of structured products in the United States. It used to distribute its structured CDs through LaSalle Bank NA.

Straightforward structure

An investment adviser said the straightforward structure of the product was a plus.

"It's easy to understand and explain," the adviser said. "The underlying is well understood, the return scenarios are straightforward. There's nothing complicated here, which is nice because you don't have to spend an entire afternoon just trying to figure out how it works."

The product is targeted at investors who are moderately bullish on the U.S. equity markets, the adviser said.

"You have to expect the S&P 500 to go up in the next 3.5 years, but you don't think it's going to go up by more than 45% to 50% during that time," the adviser said.

The adviser added that it is difficult to be certain how well the product will perform until the very end.

"It's obviously a bit of a gamble in terms of potentially breaching the barrier at any time," the adviser said.

"There's a risk of getting a 0% return at all times all the way until the product matures. The other thing is if you're trying to value this product before maturity, the higher your return on paper, the greater the risk of not getting anything, so you can't really value it much above 100%...If the S&P 500 is up 40% in June 2012, that means I could get a 40% return in two months, but it also means I have a high chance of getting a 0% return because it's so close to the barrier."

The CD could also be attractive to retail investors, the adviser said.

"In general, most CDs I think tend to be targeted more at retail simply because they're usually more risk averse and they're less likely to be hitting the FDIC account limit," the adviser said, adding: "This is a simple product to understand for retail investors who are familiar with the S&P 500 and who want to get a better yield than what they're getting for non-structured CDs."

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