Barclays' notes linked to Technology Select Sector SPDR offer uncapped upside, deep barrier

By Emma Trincal

New York, Feb. 2 - Barclays Bank plc's 0% notes due Aug. 13, 2013 linked to the Technology Select Sector SPDR fund give investors a long exposure to the large-cap technology sector with contingent downside protection, making the product appealing for conservatively bullish sector players, sources said.

If the fund never closes below the 71% barrier during the life of the notes, the payout at maturity will be par plus the greater of the index return and the contingent minimum return, which is zero, according to an FWP filing with the Securities and Exchange Commission.

Otherwise, the payout will be par plus the index return, with full exposure to any losses.

Value play

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said he likes the notes because he sees value in tech stocks and as a result is bullish on the sector.

"I like that it's a short-term note," Medeiros said.

"And I'm bullish on the tech sector because technology spending has been down over the last few years."

The Technology Select Sector SPDR exchange-traded fund tracks the price and yield performance of the Technology Select Sector of the S&P 500 index.

The Technology Select Sector index includes companies involved in information technology, semiconductor equipment and products, computers and peripherals, diversified telecommunication services and wireless telecommunication services.

"I like particularly this ETF for the top holdings and the weightings," Medeiros said.

"You have on top Apple, IBM, Microsoft, which are very large tech companies with strong growth potential.

"It's trading at a low P/E relative to the historic tech P/E, so I see the notes as a very effective trade at this attractive entry point."

Medeiros said that the estimated price-per-earnings ratio for the U.S. technology sector is 13.

It is approximately 22 for the S&P 500.

Apple Inc. is the top holding in the index with a 15.79% weighting. The second largest component is International Business Machines Corp. with an 8.45% weighting, followed by Microsoft Corp. (8.33%), AT&T Inc. (6.53%), Google Inc. (5.46%), Intel Corp. (4.29%), Oracle Corp. (4.25%), Verizon Communications Inc. (4.01%) and Cisco Systems Inc. (3.96%).

Growth opportunity

Medeiros said that the risk involved with the product is the potential breach of the 71% barrier. If it happens - and it could occur anytime, he noted - then the downside protection will be eliminated. But he sees the risk as relatively low given current valuations.

"The fact that it's at a low P/E gives me a bit of comfort. I don't anticipate too much volatility, and you're likely to keep the protection until maturity because the entry point in my view is just right," he said.

Medeiros said that an investor in the note would have, aside from dividend payments, the same upside as a direct investor in the fund since the notes are not capped, which constitutes an advantage compared to other structured notes with partial protection.

On the downside, however, the contingent protection of 29% makes the notes more favorable than the shares, he said.

"The question is to know how much you're giving up by foregoing dividends," he said.

"At first sight, it may seem that you're not giving up much, but ironically, dividends have become a very measurable component of the overall performance of the tech sector. Look for instance at some of the utilities stocks in the index like Verizon and AT&T that pay substantial dividends."

Verizon pays 5.31% in dividends. AT&T pays 5.83%.

"And yet, even without the dividends, I am comfortable with this note because you're really buying this for the capital appreciation opportunity," Medeiros said.

Sector bet

Steve Doucette, financial adviser at Proctor Financial, has a different view.

Despite the contingent protection, he sees the technology sector as vulnerable to a correction given the current bullish impetus.

As a result, he would prefer a note that, unlike this one, could provide a more enticing upside than merely the absence of a cap.

"You get the index exposure with a 30% barrier protection level," he said.

"It works if you're bullish on tech. But should you be?"

One problem with U.S. technology stocks, he said, is that most of them are large-cap stocks.

"If you buy this, you have to be bullish on large cap too because some of the large-cap growth companies, the Apples, the Googles of the world, encompass a lot of the tech companies," he said.

Large-cap stocks outperformed small caps last year. But the trend could revert easily, he said.

"Over the past six or eight months, some of those tech companies have been going through the roof," he said.

"If you believe in the momentum, if you think it's going to continue, then buying the sector with this note can make sense. At least the note gives you a little bit of protection.

"But I still think a lot of your return might come from dividends, and you're stripping it out.

"Since the structure doesn't offer enhanced returns, you're stuck if the sector doesn't end up being an outperforming asset class.

"I wouldn't do that because I tend to be a contrarian. When something is going through the roof, I tend to be cautious.

"Assuming you believe the momentum is going to continue, do you want to be in for one year and a half?"

Doucette noted that some of the risk comes from taking a directional bet on a sector.

"I usually stay away from individual stocks or sectors. I prefer broader indexes. If I have to be that specific, I don't want to have my money locked in. I want to be able to get in and out," he said.

Barclays Capital Inc. is the agent with JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC as dealers.

The notes will price on Friday and settle on Wednesday.

The Cusip number is 06738KM99.

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