JPMorgan’s uncapped dual directional buffered notes on EAFE ETF, Stoxx seen as attractive

By Emma Trincal

New York, Nov. 16 – JPMorgan Chase Financial Co. LLC’s 0% uncapped dual directional buffered return enhanced notes due June 4, 2024 linked to the lesser performing of the iShares MSCI EAFE ETF and the Euro Stoxx 50 index offer many benefits to investors seeking intermediate growth with protection within the international equity bucket of their portfolio, financial advisers said.

If each underlier finishes at or above the initial level, the payout at maturity will be par plus at least 1.3 times the return of the lesser performing underlier. The exact upside leverage factor will be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

If either underlier falls by no more than the 10% buffer, the payout will be par plus the absolute value of the return of the worst performer.

If either underlier falls by more than 10%, investors will lose 1% for each 1% decline of the worst performer beyond the 10% buffer.

Big pluses

Steven Foldes, wealth manager and founder of Evensky & Katz / Foldes Financial Wealth Management, pointed to some of the most compelling terms.

“It’s a very interesting note,” he said.

“Two and a half years is not too long. It’s the sweet spot for us.

“The idea of having a worst-of with such a high correlation between the two underlying makes it palatable. When you buy a structured note, you want to express a view. You don’t want two different asset classes.”

The three-year coefficient of correlation between the two underlying is 0.981.

“I also like the 1.3 times leverage, especially for an asset class which is going to be part of your portfolio anyway. Using this note in a diversified global portfolio makes a lot of sense.

“Having the sweetener of a 10% buffer makes it that much more interesting.”

Absolutely not

The absolute return was the caveat.

“If I was to buy the notes, I would rather give up the absolute return because two-and-a-half years from now, it’s highly likely that those two underlying will be positive,” he said.

The 10 percentage points range of absolute return offered limited value in his view.

“If I’m down 11%, I don’t benefit from the absolute return and if I’m down 2% or 3%, it’s not a big deal.

“I’d rather eliminate it to increase the leverage. Getting 1.4x or 1.5x on the upside would be much preferable. It’s more bang for your buck on the upside.

“I’m giving up the chance for a modest absolute return. But I still have the 10% buffer, which will protect me on the downside,” he said.

Based on this structural modification, Foldes said the notes would be very attractive.

“This note would be a nice addition to a diversified global portfolio especially given the fact that international markets have not recovered nearly as much as the U.S.,” he said.

European exposure

A financial adviser also had a positive view on the product although the underlying would not be his top picks as he prefers domestic equity.

However, the terms were impressive enough to warrant the non-U.S. exposure.

“Clients are much more familiar with U.S. indexes. But once you start naming the index components, people are going to be OK. The Euro Stoxx is the Dow of the euro zone. The EAFE is the go-to for international exposure. It’s easy to explain and track,” he said.

“And by the way, those indexes have higher dividend yields, which is part of the reason the terms are so good.”

The high correlation between the two underliers was also welcomed.

“This high correlation between the two gives me a much greater level of confidence in my decision to invest in a worst-of,” he said.

“It’s probably because more than half of the EAFE is made of European stocks. That overlap works to your advantage.”

The sky is the limit

But one of the most attractive aspects of the structure was its potential for growth.

“It’s so unusual to get not just uncapped upside but levered uncapped upside over such a short period of time,” he said.

“Investors are immediately getting a 30% bonus on top of the index. That 30% kicker is enough to make up for the loss of dividends.”

Uncapped leveraged exposure could pay off generously with underperforming asset classes, he noted.

“We’re hitting all-time-highs in the U.S. But those international markets have probably a lot more room on the upside over the next two and a half years. You have a chance to outperform nicely unless the worst-of index is barely moving,” he said.

“You’re also going to outperform on the downside given the buffer and the absolute return.

“It’s a really nice offering for this non-U.S. part of the portfolio.

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes will price on Nov. 30 and settle on Dec. 3.

The Cusip number is 48132YKM6.

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