JPMorgan’s $1.26 million uncapped leveraged notes on S&P, Dow aimed at long-term bulls

By Emma Trincal

New York, April 20 – JPMorgan Chase Financial Co. LLC’s $1.26 million of 0% uncapped accelerated barrier notes due April 20, 2026 linked to the least performing of the S&P 500 index and the Dow Jones industrial average offer attractive terms to long-term bulls while providing adequate protection, a financial adviser said.

If each index finishes at or above its initial level, the payout at maturity will be par plus 1.3 times the return of the worst performing index, according to a 424B2 filing with the Securities and Exchange Commission.

If any index falls but each index finishes at or above the 65% barrier level, the payout will be par.

Otherwise, investors will be fully exposed to the decline of the worst performing index.

Five-year term

“We like long-term notes quite a bit. For us, five years is just fine,” this financial adviser said.

“Our approach is to not bet against the market. If you’re talking five years down the road, it’s even more dangerous to bet against the market. The market usually goes up unless you’re in 1999 or 2008. But right now, other than government spending, I don’t see anything in the market that’s unsustainable or that would make us fall off a cliff.”

“You’re losing the dividend, but the leverage compensates you for that. You don’t need a huge return to break even.”

The Dow Jones industrial average yields 1.78% and the S&P 500 index, 1.4%.

Solid barrier

In addition, the chances of either index finishing negative are low, he said.

“Statistically, it’s a 17% chance if you look at five-year rolling returns on the S&P 500 index,” he noted based historical data for this index since 1950.

“Now the odds of finishing below the barrier are almost negligeable. Looking at our data, we found nine days out of 16,441 observations. That’s about 0.055%.

“With that kind of barrier, I feel extremely confident about the downside,” he said.

Bullish note

The potential for gains was also appealing, according to this adviser.

“The chances of outperforming the market on the upside are definitely there,” he said.

The only way investors would “lose” would be if there was a wide disparity of returns between the S&P and the Dow.

“But you may not even miss it with the leverage,” he said.

Investors may also be disappointed if the market ends up flat at the end of the term. But the odds of limited returns over a five-year period are small, he said.

Using the same data for the S&P 500 index, he found that a return between 0% and 10% over five years has shown a 6.2% frequency.

“You’re really stacking the deck in your favor,” he said.

“As long as you’re comfortable owning the worst-of, which is usually where you get the best terms, this note can really be a good addition to the portfolio. I would definitely take the worst-of with 1.3x leverage versus a single index with no leverage.”

Cheap

This adviser said he also liked the 0.7% fee.

“This is cheap for a five-year and that’s probably why you’re getting those good terms,” he said.

“I’m comfortable with the structure of this note. I like the underlying benchmarks, the length, the issuer’s credit and even the fee.

“I’m really surprised they only sold $1.26 million of it.”

Creditworthiness, cost

Steven Foldes, vice-chairman at Evensky & Katz / Foldes Financial Wealth Management, cited the positive features of the deal first.

“JPMorgan is a strong credit. The fee is very reasonable especially for a five year. It’s a worst of the S&P and the Dow, but these are indices that are very highly correlated with each other,” he said.

The five-year coefficient of correlation between the two underliers is 0.967.

“These two are pretty much in lockstep with each other so having a worst-of on these two is not a problem at all.

“Finally having 1.3 times leverage is very nice, particularly when it’s uncapped,” he said.

Tradeoff

However, Foldes pointed to two aspects of the structure that would preclude him from buying the note.

First, “five years is a long time,” he said.

Second, especially on such a long tenor, the 65% barrier was “unnecessary,” he added.

“It’s very unlikely that over a five-year period either one of those indices would be down, let alone down 35%,” he said.

“I would eliminate this barrier and try to increase the leverage instead.”

Foldes said he would be “very curious” to know how much more upside leverage could be obtained in getting rid of the downside protection.

Focusing on the leverage rather than on the protection for a longer-dated note made more sense in his view.

“Your risk exposure is less on a five-year. But your opportunity cost is greater because of the cumulative loss of dividends.

“The idea of trying to maximize the return with the leverage factor is more important,” he said.

The notes are guaranteed by JPMorgan Chase & Co.

The agent is J.P. Morgan Securities LLC.

The notes settled on Tuesday.

The Cusip number is 48132TTJ5.

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