Barclays’ two issues of notes on non-U.S. equity indexes to meet different return expectations

By Emma Trincal

New York, Sept. 7 – Barclays recently issued two comparable offerings distinct only for their upside payout, with one note – a digital note – more adapted to a low-return environment while the other – a leveraged product – was more tailored for a pure bullish play.

The maturity date, underlying, barrier level, uncapped upside and pricing dates were the same in both deals.

Digital, leveraged, no cap

In the first issue, investors receive a minimum payment in a flat or up market.

Barclays Bank plc priced $6.21 million of 0% trigger step securities due Aug. 31, 2026 linked to an unequally weighted index basket, according to a 424B2 filing with the Securities and Exchange Commission.

The basket consists of the Euro Stoxx 50 index (40% weight), the Nikkei 225 index (25% weight), FTSE 100 (17.5% weight), the Swiss Market index (10% weight) and the S&P/ASX 200 index (7.5% weight).

If the basket return is zero or positive, the payout at maturity will be par plus the greater of the basket return and the step return of 39.05%.

If the basket return is negative, investors benefit from the contingent protection of a barrier set at 75% of initial price.

In the second offering, Barclays Bank priced $6.42 million of 0% trigger gears due Aug. 31, 2026. The basket is identical (same components and weightings). The upside payout consists of par plus 2.2775 times any basket gain.

Developed markets

“Both notes try to replicate the EAFE, but the advantage versus the ETF is the barrier. The 25% protection is attractive,” said Tom Balcom, founder of 1650 Wealth Management.

The EAFE index is composed of large- and mid-capitalization developed market equities, excluding the U.S. and Canada.

This index is overweight Europe. Its top country exposures are Japan followed by the U.K.

“The 39% return is pretty modest. On an annualized compounded basis, it’s 6.81% return. On a five-year period, you should get much more than that,” Balcom said.

He looked at the performance of the exchange-traded fund that tracks the EAFE index – the iShares MSCI EAFE ETF. Over a five-year period, this fund generated a 9.49% annualized return, according to Morningstar.

“It could happen. You could have much lower return, but I think you’re more likely to do better with the leveraged note,” he said.

Different outlooks

“I guess if you expect a very modest performance, the first one is the preferred choice. If on the other hand you’re bullish, the leveraged one is better.

“You could combine the two. That way, you increase the likelihood of outperforming the basket whether it ends up flat or much higher.”

Balcom said he also liked the fact that both notes are uncapped.

“That way, you will participate in the upside one way or the other,” he said.

Yield enhancement, fees

The digital notes with the minimum return could also be used as fixed-income replacement, according to this adviser.

“You get at least 6.8% per year and perhaps more. With yields so low these days, it’s an attractive play although not a pure income play. But the 75% downside protection is a nice barrier. The probabilities of a decline of more than 25% five years from now are pretty small. I don’t have the stats but if I had to guess, I would think, it’s probably less than 10%.”

Another important difference between the two notes was cost.

The fee is 3.5% on the first deal and 0% on the second.

“Obviously one is for brokers, the other, probably for RIAs,” he said.

“In both cases, it’s designed for investors who want exposure to non-U.S. equity assets.”

Almost bearish

Donald McCoy, financial adviser at Planners Financial Services, said that the “step securities” would work in a flattish market environment.

“It’s going to be for people who have low expectations about the market,” he said.

“If you’re assuming a 3% to 4% a year over five years, getting 39% is quite enticing.”

This scenario of very low returns could be the result of a sell-off or bear market.

The basket could for instance incur heavy losses in the first or second year, then recover, leaving the final return close to flatline, he explained.

Hardly bullish

The other deal matches a more upbeat outlook but not necessarily a very bullish one.

The EAFE has produced about 10% a year for the past five years, he said.

“Imagine you only get half of that, so let’s say 5% a year.

“Over five years, it’s a 25% return.

“The first note will give you 39%, the second one, 57% with the leverage.

“The leveraged note outperforms significantly the other, and that’s true even if you’re just moderately bullish on international stocks because a 25% return over five years is a pretty conservative assumption.”

Low breakeven

It would take a very poor performance to make the first deal better than the second one, he said.

Based on the 39% minimum return and the 2.28 leverage multiple, he found the breakeven point to be at 17.1%.

“If after five years, the basket is up 17.1%, the returns would be roughly equal. Anything above 17.1% and the leveraged note is going to win.

“17.1% over five-year is not a high number.

Since both notes have the same underlying basket, tenor and downside protection, they can easily be compared, he said.

McCoy concluded about the structure that the leveraged note is likely to produce higher returns than the digital product, simply because a 17% return is an extremely low hurdle.

Still, the digital product may still have a place in a portfolio, he said.

“The one with the 39% minimum is for someone who thinks the market might be down some over the next five years or that it will be up a little bit.

“It’s definitely for people with hardly any expectations of positive return.”

Value

Finally, McCoy examined the embedded investment theme.

“A lot of people think international markets have better valuations than the U.S. It’s not necessarily untrue.

“But we never really know when value is going to really outperform growth and for how long.

“When you look at international markets, they’re still lagging the U.S. after 10 years,” he said.

The S&P 500 index has outperformed the MSCI EAFE index by more than eight points on an annualized basis over the past five years as well as the past 10 years, according to Morningstar.

“It’s the same thing with U.S. value stocks. They did well for a while. Then things turned around and growth crushed them,” he said.

UBS Financial Services Inc. and Barclays are the agents on both deals.

Each offering priced on Aug. 27 and settled on Aug. 31.

The Cusip number is 06747X797 for the trigger step securities and 06747X821 for the trigger gears.

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