Deutsche Bank's BUyS tied to S&P 500, four ETFs offer global exposure with strong U.S. focus

By Emma Trincal

New York, Aug. 3 - Deutsche Bank AG, London Branch's 0% capped buffered underlying securities due Feb. 18, 2015 linked to an equity basket are for bullish global equity investors with a strong bias toward the U.S. market.

The basket includes the S&P 500 index with a 70% weight, the iShares MSCI EAFE index fund with a 15% weight, the SPDR S&P MidCap 400 ETF Trust with an 8% weight, the iShares MSCI Emerging Markets index fund with a 4% weight and the iShares Russell 2000 index fund with a 3% weight, according to an FWP filing with the Securities and Exchange Commission.

The structure offers some moderate leverage with a cap as well as a 20% buffer.

The payout at maturity will be par plus 140% of any basket gain, subject to a maximum return of 42% to 56% that will be set at pricing. Investors will receive par if the basket declines by 20% or less and will lose 1% for every 1% that it declines beyond 20%.

For bulls

Jakob Bronebakk, partner at Jubilee Financial Products LLP, said that the structure targets bullish investors given the limited leverage of 1.4 times.

"This is for an investor with a bullish outlook," he said.

"When you buy a leveraged product, you always expect the market to go up, otherwise you would buy an autocallable or something less directional.

"But here, given the cap and limited leverage, you have to be pretty bullish."

Investors will not benefit from any appreciation of the basket beyond the 42% to 56% cap range, which is 12% to 16% on an annual basis.

In order to obtain the maximum return, the actual rate of return for the basket needs to be between 8.5% and 11.5% based on the leverage ratio.

"It's a typical U.S. investor's portfolio, and they're replicating that with a bit of leverage and a good buffer," said Bronebakk

"It provides investors with enhanced return on the upside while protecting some of the downside.

"I like the combination of a reasonable buffer with a bit of leverage."

The basket allocates 81% to U.S. stocks, 15% to developed countries and only 4% to emerging markets. U.S. large-cap stocks make up the most significant weighting with 70% allocated to the S&P 500 index within the basket.

Value play

The underlying basket could be appealing to contrarian as well as value investors, according to Jack Ablin, chief investment officer at Harris Private Bank.

"I like the mix. It's a very good blend based on the relative valuation of the market," said Ablin.

"It would be our preference too to be overweight the U.S. and underweight emerging markets. The U.S. is cheap relative to emerging markets. The developed countries are starting to look better, but we still prefer U.S. large caps. They're the ones everybody hates right now."

Ablin agreed that U.S. stocks are going through a phase of volatility given concerns over the economy slowing down.

The Dow Jones Industrial Average finished up for the first time on Wednesday after eight consecutive days of losses, he noted.

"U.S. stocks are trading at a big discount, and maybe there is a reason," he said.

"There's economic risk in the U.S., but market risk is in emerging markets where you have high valuations.

"I am a risk manager, so I first look at where I want to take the risk. Then I look at the relative value.

"To me, this is the time to invest in the U.S. market."

The notes (Cusip: 2515A1AB7) are expected to price Aug. 10 and settle Aug. 15.

Deutsche Bank Securities Inc. is the agent.

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