JPMorgan’s leveraged notes on Stoxx, EAFE ETF has advisers concerned about European exposure

By Emma Trincal

New York, April 1 – JPMorgan Chase Financial Co. LLC’s 0% uncapped buffered return enhanced notes due April 3, 2025 linked to the lesser performing of the iShares MSCI EAFE ETF and the Euro Stoxx 50 index offer a bullish uncapped leveraged play with a buffer over a three-year tenor. Advisers said the terms were attractive except for the buffer, which may not provide enough protection against war-induced risks in Europe.

If each underlier gains, the payout at maturity will be par plus 1.9 times the return of the lesser-performing underlier, according to a 424B2 filing with the Securities and Exchange Commission.

If either underlier finishes flat or falls by up to 10%, the payout will be par.

If either underlier falls by more than 10%, investors will lose 1% for every 1% that the lesser-performing underlier declines beyond the buffer.

Uncertainty in Ukraine

“I would prefer a bigger buffer,” said Matt Medeiros, president and chief executive of the Institute for Wealth Management.

“10% is probably not enough for that period of time especially on these indices.

“My main concern is the exposure to Europe in light of what’s happening in Ukraine. The war could have repercussions on Western Europe.”

Sixty percent of the MSCI EAFE fund consists of European countries, which include the U.K., France, Switzerland, Germany, the Netherlands, Sweden, Denmark, Italy and Spain.

“It’s impossible to know what’s going to happen in this part of the world. Wars are not risks you can easily model.

“The three-year uncapped is great. But the buffer is a bit light relative to the timeframe and the current conditions in Ukraine,” he said.

For bulls only

A financial adviser said the notes were designed for bulls.

“Generally, I don’t like worst-of because issuers tend to pick underlying that are not necessarily moving in the same direction. These two are highly correlated, so it’s more of a fair deal if you like the worst-of,” this adviser said.

The coefficient of correlation between the Euro Stoxx 50 index and the iShares MSCI EAFE ETF is 0.96.

“If you want leverage, you get it with a little bit of protection but not much. But it’s good leverage with no cap.

“You’re just not getting a lot of protection. I guess you have to be comfortable with that.

“I’m not saying it’s a good or a bad deal.

“But if you’re willing to hang for three years, you better believe on the upside.

“In the current environment, especially over there, the 10% is almost negligible.

“It’s a bullish play,” the adviser said.

Europe is more at risk of a recession than the United States, according to this adviser.

“In the U.S. the Fed can always print more money. We’re still the best house in a bad neighborhood.

We have energy security problems. They have it worse. But three years is a long time. Nobody wants shortages indefinitely, nobody wants famine. Central banks will work together if we have a global recession,” the adviser said.

Recession risk

A wealth manager expressed concerns about the exposure to European markets.

“It’s a nice note for exposure to Europe if you want to allocate to Europe. We know that Europe is more reasonably priced than U.S. markets,” he said.

One factor that may add risk is the high allocation to financial stocks in both underliers.

Financials represent the top sector weighting in the MSCI EAFE ETF with a 17.7% allocation. The sector is the third largest one in the Euro Stoxx 50 index with a 14.7% weighting.

“The fact that Europeans can’t get gas has the potential to kill their economy. Will they come out of it? Any big recession can have a very negative impact on banks,” he said.

The “in between” three-year timeframe made risk difficult to assess, he said, as bear markets may recover rapidly but perhaps not quickly enough depending on their magnitude.

“It’s hard to tell where we’ll be three years from now. With those notes, if your timing is off, you run into problems,” he said.

Basket preferred

Rather than investing in a worst-of, this wealth manager said he would use a basket of indexes, possibly on an equally weighted basis.

“With this note, you’re long the index that has the worst performance. If one of these is down, you’re long the loser. I’d rather give up some of the leverage and get the exposure to the average of the two,” he said.

The Euro Stoxx 50 has underperformed the MSCI EAFE fund over the last three and five years, he noted.

“They may be correlated, there’s still some spread, and you want to capture it,” he said.

Investors considering the notes should expect both underliers to rise enough to make the leverage worthwhile.

“No matter how much leverage you have, if the market ends up flat, it’s not going to help.

“This could happen if a rally is preceded by a bear market.

“Leverage works if the note matures at the right time,” he said.

“At least this note doesn’t have a cap, and that’s an advantage.

“I haven’t seen a lot of three years leverage with no cap plus the buffer. In that regard, that’s a nice note.”

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The Cusip number is 48133DNW6.

The fee is 1.125%.

The notes were expected to price on March 31 and to settle on April 5.

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