Barclays' Super Track digital notes tied to SPDR S&P Metals target modestly bullish investors

By Emma Trincal

New York, May 7 - Despite a volatile underlying, the structure of Barclays Bank plc's 0% buffered Super Track digital notes due May 30, 2014 linked to the SPDR S&P Metals & Mining exchange-traded fund offers an attractive play for moderately bullish investors, said Scott Cramer, president of Cramer & Rauchegger, Inc.

If the fund return is greater than or equal to zero, the payout at maturity will be par plus the digital percentage, which is expected to be 18% to 20% and will be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the fund share price declines by 20% or less and will lose 1% for every 1% that it declines beyond 20%.

Valuation

"This is for someone who believes that the stocks in this fund will be worth more in two years than today," he said.

"I am not so sure," he added, stressing the risk inherent with the sector, made of S&P 500 companies involved in mining and producing precious metals.

"And yet, the structure makes it worth taking that bet if you're slightly bullish on this sector," he said.

Pointing to the fact that the index was diversified across aluminum, steel, gold, copper and other sectors, which he said was a positive, the main driver behind the growth of the underlying fund was the pricing of each metal.

"Inflation is going to help with this if one believes in this scenario," he said.

"On the other hand, some of these metals really have things working against them.

"Except for gold, all of those metals are used in manufacturing. If manufacturing goes down, metals may be running into some headwinds."

Cramer said he was not bullish on gold, which has already been through a strong correction since October.

"There is plenty of room for more correction. Gold will be a drag on the fund," he said.

Structure, outlook

Despite his cautious outlook, Cramer said that the structure offered a "good deal" for an investor seeking to express a mildly bullish view on the sector.

"If someone wants to have exposure to precious metals, it makes sense to use this product," he said.

Even if the ETF was flat or modestly up after two years, investors would still be pocketing an18% to 20% digital return, which would represent 9% to 10% per annum.

"Of course you do have to have some conviction that the sector will do well," he said.

"But it's a great bet if you're just moderately bullish because the digital is likely to be higher than the actual performance of the fund.

"Your cap is 20% on the upside. But it's probably a higher return than what you would expect on metals anyway.

"And you do have 20% protection on the downside.

"So it's better than investing directly in the ETF.

"People are giving up the liquidity. This is not a trade, this is a two-year position," he said.

Niche investing

Carl Kunhardt, financial adviser at Quest Capital Management, said that the underlying was too volatile and too narrow as a sector to compel him to bid on the notes.

"This is not something I would even consider," he said.

"First, I don't invest in sectors, and certainly not in a narrow niche investing sector as mining. I don't know that sector and as an adviser, you need to know where you're investing your client's money.

"Anytime you focus solely on a slice of the market, you're adding risk," he said.

Kunhardt also did not find the risk reward profile of the product appealing given the volatility of the underlying fund.

"This is one of the most volatile sectors of the S&P 500. You would expect a cap but if the sector is up, at 18% you're losing all the benefits of investing in commodities.

"And on the downside, you have 20%. But you can breach 20% in a day in commodities," he said.

The notes (Cusip: 06738K4R9) will price May 29 and settle May 31.

Barclays Capital Inc. is the agent.

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