Absolute return is ‘gravy’ in JPMorgan’s $648,000 leveraged notes on EAFE, Stoxx, source says

By Emma Trincal

New York, March 15 – JPMorgan Chase Financial Co. LLC’s $648,000 of 0% uncapped dual directional buffered return enhanced notes due Sept. 12, 2024 linked to the iShares MSCI EAFE exchange-traded fund and the Euro Stoxx 50 index provide many favorable terms including the leverage, the term and the absence of a cap, advisers said. But the absolute return was not an important element, they added.

At maturity, if the least performing underlier finishes flat or gains, the payout at maturity will be par plus 1.54 times the return of the least performing underlier, according to a 424B2 filed with the Securities and Exchange Commission.

If the least performing underlier declines by up to 15%, the payout at maturity will be par plus its absolute value.

Otherwise, investors will lose 1% for each 1% decline of the least performing underlier below 15%.

Good things

“There’s a lot to like about this note,” said Steven Foldes, wealth manager and founder of Evensky & Katz / Foldes Financial Wealth Management.

“JPMorgan is one of the strongest, if not the strongest credit in the U.S.,” he said.

He pointed to the underwriting commission of 0.4% disclosed in the prospectus.

“That’s a very reasonable fee,” he added.

Foldes said he liked the choice of the two indexes for their high correlation, which is the result of overlapping exposures to Europe.

The MSCI EAFE fund has a 60% weighting in European stocks while the Euro Stoxx 50 index is the benchmark for the euro zone.

“They have a very high correlation, which is always desirable when you invest in a worst-of. You don’t want two very different underlying going in opposite directions,” he said.

Tenor, upside, entry

Finally, the tenor was also adequate.

“Two-and-a-half years is good. We don’t like longer-term notes. Over two-and-a-half years, it still makes sense to have a buffer. We do like the 15% buffer a lot,” he said.

For Foldes, the current crisis in Europe could cause significant volatility. But he expects the crisis to be over within the timeframe of the notes, giving the markets enough time to recover from further drops.

The upside was also attractive, he added.

“The fact that you’re getting 1.54x leverage without a cap on just two-and-a-half years is appealing.

“You’re giving up roughly 7.5% of the dividend but you’re getting more than 1.5x leverage, so there’s a high likelihood that you will more than make up for the dividend,” he said.

The current market sell-off helped make the outlook brighter for investors who believe in mean reversal.

“Both indices are way off their highs. Hopefully, there is room for upside at those entry levels,” he said.

The Euro Stoxx 50 index is down 20.2% from its multi-year high of June. The EAFE fund has shed more than 15% from its September peak, which was its highest point since October 2007.

Repackaging it

Foldes was slightly more critical about the dual directional feature, judging its benefits limited.

“Given that both underlying are 15% to 20% off their highs and given the current political issues, which I believe will be resolved in two-and-a-half years, I would give up the absolute return feature. If it’s slightly negative, you’re not going to make much money out of the absolute return. Instead, I would try to enhance the upside, for instance pushing to 1.6, 1.7 or 1.8 times leverage.

“I would keep the buffer though. But the absolute return is just icing on the cake. If I was to redesign the note, I’d rather give that up for more leverage on the upside,” he said.

The notes are timely and attractive for asset allocators dedicating a portion of their equity portfolio to international markets.

Foldes said he allocates between 25% and 33% of his equity portfolio to international markets.

“If you like international as we do, having uncapped leverage with a buffer is a very useful thing to have in your equity portfolio.

“We like this note. JPMorgan did a very good job,” he said.

European exposure

Another financial adviser had a similar view on the product.

“JPM is a good quality issuer,” this adviser said.

“The fee is amazingly low. I’ve pounded the table to get 40 basis points fee for years. I wish we would have had that four years ago.”

This adviser was more hesitant about the two underliers, saying that many of his clients are not necessarily familiar with non-U.S. benchmarks. However, this problem can easily be overcome.

“If you tell them about the top constituents, suddenly they’re more comfortable. Ask them if they know Nestle, Shell or Toyota and of course, they answer is yes.”

High-dividend yields

One bigger concern about those underliers was the gap between price returns and total returns given the high dividend yields paid by those indexes in relation to U.S. assets.

“You’re talking about yields in the neighborhood of 2% to 3.5% depending on the type of dividend yield you’re looking at,” he said.

“Since a structured note only gives you the price return, you’re missing some of the growth.

“However, the leverage should be enough or even more than enough to make up for the lack of dividend.”

He offered an example.

“Your total return is 10%; your price return is 8%; you’re only getting 8% but with the leverage, you’re getting more than 12%.”

Terms

What made the deal especially attractive was its structure.

“The leverage without a cap can easily give you a decent return,” he said.

“I like the 15% buffer a lot. You actually need it even more over shorter timeframes like this one.”

The 30-month period in particular required particular attention, he noted.

He looked at statistics on the EAFE index measuring the probabilities of losses over specific timeframes.

“The period of time that gives you the highest probability of losing 30% or more is the 25-month period. Anywhere between 24- and 30-month is riskier,” he said.

This adviser was not particularly interested in the dual directional piece of the structure.

“It’s kind of gravy. I’m more interested in the buffer. I’m used to seeing 10% buffers for that kind of short timeframe. So, 15% is good,” he said.

While the underlying exposure would not be his first choice, this adviser said the note would be a good addition to an equity portfolio.

“I can see this product used either as a supplement or as a tool to incite a client to rebalance,” he said.

“This is a very nice offering.”

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes settled on Friday.

The Cusip number is 48133DQG8.

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