Barclays' buffered leveraged notes tied to PowerShares QQQ target mildly bullish tech investors

By Emma Trincal

New York, July 23 - Barclays Bank plc's 0% buffered Super Track notes due Aug. 7, 2014 linked to the PowerShares QQQ Trust, Series 1, are aimed at investors who are moderately bullish on technology and want sector exposure with less risk, said Scott Cramer, president of Cramer & Rauchegger, Inc.

The payout at maturity will be par plus double any fund gain, up to a maximum return of 21.8% to 25.8%, according to a 424B2 filing with the Securities and Exchange Commission. The exact cap will be set at pricing.

Investors will receive par if the shares fall by up to 15% and will lose 1% for every 1% that the shares decline beyond 15%.

"This is for someone who believes in technology stocks but does not anticipate a huge growth looking forward," Cramer said.

The PowerShares QQQ Trust, Series 1, tracks the Nasdaq 100 index, which represents the 100 largest non-financial companies listed on the Nasdaq. The index is highly concentrated in technology: its top eight holdings are Apple Inc., Microsoft Corp., Oracle Corp., Google Inc., Intel Corp., Amazon.com Inc., Cisco Systems Inc. and Qualcomm Inc.

Mildly bullish

"This is a product that will do very well if growth in technology is sluggish because you get the two-times leverage on the upside. And you also have some downside protection from a meltdown or catastrophic event," Cramer said.

In a slow-growth environment, the notes would perform better than a direct investment in the fund, he noted. If the underlying fund finished negative, the buffer would allow investors to outperform the fund.

"The product offers some protection against the downside risk and a way to get enhanced returns if there is not much growth. It's not a bad trade-off if this is your view, if you believe that growth is going to be anemic," he said.

"You do give up a little bit of liquidity for two years, but you can mitigate some of the risk and get enhanced return. That's the trade-off. I'd love to find the perfect investment, an 18% CD for instance. But there is no perfect investment."

Headwinds

Cramer did not indicate whether he is bullish or bearish on the underlying fund.

"Nobody knows for sure," he said.

"I wouldn't say I am bearish on the market in general, but I'm extremely cautious.

"We have a bunch of things indicating slower or no growth ahead. Look at Europe; look at other countries and the U.S. It appears that growth is going to be hard to come by. A lackluster growth would of course impact earnings and stock prices.

"In addition to that, you have a number of catastrophic events. In the U.S., you have the fiscal cliff and some political risks. There are plenty of political risks all over the world whether you consider the Middle East or Europe, where some countries are having political unrest.

"So this type of investment would offer some form of protection if there is no explosive growth. A 15% buffer on a two-year is pretty good. Should you put your entire portfolio in it? No. But this could be a way to enhance your returns if you're mildly bullish while protecting the first 15%."

Upside risk

Carl Kunhardt, wealth adviser at Quest Capital Management, said that the underlying fund is too volatile for his taste.

"I wouldn't do it," he said.

"This is very tech-weighted. If I get two years, I am going to come up against the cap very quickly given the high volatility of the sector.

"I'm giving up a lot of upside with that kind of cap, the leverage notwithstanding, and at the same time, I can easily hit the buffer.

"If I'm going to accept the risk of a sector play like this one, why would I limit my upside?"

Kunhardt's view on the notes reflects a more bullish take on technology.

"The biggest risk here is on the upside. With 22% over two years, or 11% a year, you're seriously limiting your potential gains," he said.

Other strategies

The underlying fund has a dividend yield of 0.82%. Investors in structured products forgo dividends, which are used to price and structure the notes.

"You're not giving up much on dividends, so they're really using volatility to offer you some of the terms like the 15% buffer," Kunhardt said.

"I'd rather hedge in different ways. If I believe I'm not going to get a lot of capital appreciation, I'd look for dividend-paying securities. I can at least get something. For the downside, I use S&P 500 BuyWrite ETFs to hedge the market risk."

The CBOE S&P 500 BuyWrite index is a benchmark designed to track the performance of a hypothetical buy-write strategy on the S&P 500 index.

The strategy is based on buying an S&P 500 stock index portfolio and writing the near-term S&P 500 index covered call option. It is designed to produce returns comparable to that of the S&P 500 with much less risk.

Barclays Capital Inc. is the agent.

The notes will price Aug. 2 and settle Aug. 7.

The Cusip number is 06741TDA2.

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