CIBC’s $518,000 buffered notes on ETF basket offer easy access to international allocation

By Emma Trincal

New York, Oct. 6 – Canadian Imperial Bank of Commerce’s $518,000 of 0% market-linked securities with leveraged upside participation and a fixed percentage buffered downside due Oct. 7, 2024 linked to a basket containing the iShares MSCI EAFE ETF with a 60% weight and the iShares MSCI Emerging Markets ETF with a 40% weight are designed to facilitate allocation to international equity within a portfolio, advisers said.

The payout at maturity will be par plus 1.25 times any basket gain, up to a 30% maximum gain, according to a 424B2 filing with the Securities and Exchange Commission.

If the basket falls by up to 10%, the payout will be par.

Investors will lose 1% for each 1% basket decline beyond 10%.

One ticket

“I like the concept of it,” said Tom Balcom, founder of 1650 Wealth Management.

“For asset allocators, you get an international exposure – international developed and emerging markets – all in one.

“I like that aspect.

“There is a certain ease of purchase. You get your international allocation in one ticket.”

Unfortunately, Balcom did not like the terms, in particular the cap, which is “only” 6.78% on an annualized compounded basis.

“That’s a very low rate of return,” he said.

“The cap is modest. And the 10% buffer is modest too.”

Dividends

Investors in the notes, as with any other structured notes, must give up dividend payments, he noted.

The iShares MSCI EAFE ETF yields 2.15%, the MSCI Emerging Markets ETF, 1.20%.

“You lose your dividend yield and it’s over a four-year period,” he said.

“The basket is down 10%. If you compare it to being long the ETFs with the dividends, it’s pretty much a wash.”

The tenor was another setback.

“You’re going to hold this for four years and get – best-case scenario – 30% at the end? Are your clients going to be happy with that return?” he said.

Haircut

Balcom said the 4.17% fee, which is disclosed in the prospectus, was “too high.”

“It’s all baked into the notes, and you’re going to get par plus the return. But with a lower fee you would have had better terms obviously, like a higher cap, for instance,” he said.

The issuer on the trade date disclosed an estimated value of $921.90 per $1,000 of principal amount. The “estimated initial value” or EIV is always less than the principal as the difference incorporates the fee, the cost of the options and other costs incurred by the issuer to structure the product.

“The further it is from par, the bigger the haircut you’re going to take if you want to sell it after you buy it,” he said.

Issuers have long recommended that investors hold structured products until maturity. In practice however, advisers with experience in purchasing the products want to be able to exit the position when deemed appropriate for their clients without incurring excessive costs in the secondary market known for its lack of liquidity.

“I like the one-ticket concept for an international equity allocation. But I’m not crazy about the terms. The fee is too high,” he concluded.

Asset allocation tool

Donald McCoy, financial adviser of Planners Financial Services, said the notes were a relatively good fit for a conservative investor.

“I can see where this could be suitable for someone who’d want to get international exposure but would need the downside protection as an enticement to stay in,” he said.

“Obviously if you’re bullish you wouldn’t want the cap.”

The downside protection was a plus. It was even more necessary given the inclusion of the emerging markets fund, which is more volatile than the EAFE fund, he added.

“The 40% weight in emerging markets is fairly significant.

“I don’t think I would use this if this was my only international allocation.

“But you can certainly pair this with a more conservative investment,” he said.

Europe weight

The note however offered the convenience of a “combined portfolio of the two funds in a 60/40 split.”

“The note is not going to rebalance back though. It’s just something to be aware of,” he said.

The non-payment of dividend was part of the trade-off investors must make when buying structured notes in general.

“If you’re looking at the EAFE, the dividends are significantly higher and that’s because a lot the portfolio is in European stocks, which pay higher dividend yields,” he said.

“The higher the yield and the longer the term, the bigger the price you pay.

“But that’s the price you’re paying for the downside protection.”

Conservative profile

Overall, McCoy was relatively neutral on the notes.

“The cap is fairly low. But you get the safety of a 10% buffer. If you want a more conservative exposure to international equity and as long as you know that emerging markets are a volatile asset class, it makes sense,” he said.

The timing was also relevant.

“Current valuations suggest that international stocks should outperform U.S. stocks over a reasonable amount of time,” he said.

Wells Fargo Securities, LLC is the agent.

The notes priced on Sept. 30 and settled on Oct. 5.

The fee is 4.17%.

The Cusip number is 13605WD57.

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