Bank of Montreal’s booster notes tied to Euro Stoxx outperform in some up and down scenarios

By Emma Trincal

New York, April 7 – Bank of Montreal’s 0% upside booster notes with barrier due April 30, 2018 linked to the Euro Stoxx 50 index give investors a digital return when the index finishes up or down but within a range, making the notes appropriate for investors seeking to outperform the market and for those betting that the index will trade sideways, sources said.

If the index return is greater than 24%, the payout at maturity will be par plus the index return.

If the index return is between negative 10% and positive 24%, the payout will be par plus 24%.

If the index return is less than negative 10%, investors will lose 1% for every 1% that the final index level is less than the initial level.

‘Steep cliff’

“You come ahead if the market generates a small return. Getting a positive return of 24% even if the index finishes down 10% allows you to significantly outperform the index,” Donald McCoy, financial adviser at Planners Financial Services, said.

But the notes present significant risk as well.

“The fact that it’s a barrier and not a buffer adds a little bit of uncertainty. Obviously, the best-case scenario is very close to the worst. Your best case is if the index is down 10% and you get 24%. You beat the index return by 34%,” he said.

“One step in the other direction though and you lose all that. That is a steep cliff ... to go from plus 24% to minus 11% by just one percentage point difference. That’s a big swing.”

Risk tolerance

The nature of the barrier protection makes the notes unsuitable for conservative investors, he said.

“Those may prefer a 10% buffer even if it means getting the 24% boost at a higher strike than the barrier level, like at the initial price for instance, which is standard,” he said.

Such structure would make the upside potential less attractive but would probably better fit the risk-averse profile, he added.

“With a 10% buffer investors wouldn’t have to worry about the downside,” he said.

However, the notes could still be attractive to investors with a moderate risk profile despite the fact that the protection is offered through a barrier and not a buffer.

“You’re still protected within that negative range,” he said.

“If you want exposure to the Euro Stoxx and if you’re not a conservative investor, this note seems appropriate.”

Dividends and expectations

Tom Balcom, founder of 1650 Wealth Management, said that if the market returns are modest, investors have a chance to outperform. But the market view has to be right.

He pointed to the 3.45% dividend yield paid by the index, which investors must forgo, which represents over the term of the notes about 10%.

“If you believe that the returns on the upside or downside are going to be muted, this note makes a lot of sense,” he said.

“If your viewpoint is that there will be a correction at maturity, then I would not suggest purchasing this note since you’ll lose out on dividend payments.”

The notes (Cusip: 06366RH65) are expected to price April 27 and settle April 30.

BMO Capital Markets Corp. is the agent.

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