Citi’s dual directional on QQQ, regional banking ETF offer range bound trade, bearish bias

By Emma Trincal

New York, June 12 – Citigroup Global Markets Holdings Inc.’s 0% dual directional barrier securities due June 20, 2025 linked to the worst performing of the Invesco QQQ Trust, Series 1 and the SPDR S&P Regional Banking ETF could match a bearish or range bound market outlook, but the bet is tactical and may not accommodate a long-term view or bullish stance, according to financial advisers.

If the worst-performing ETF gains, the payout will be par plus 100% of the worst-performing ETF gain subject to a maximum upside return of at least 48%, according to a 424B2 filing with the Securities and Exchange Commission. The exact maximum upside return will be set at pricing.

The payout will be par plus 100% of the absolute value of the worst-performing ETF return if the worst-performing ETF declines but ends above the 60% final barrier.

Investors will lose 1% for every 1% that the worst-performing ETF declines if it finishes below the final barrier.

Wide spread

Kirk Chisholm, wealth manager and principal of Innovative Advisory Group, said the structure of the notes gave investors a wide range of potential gains on both directions of the trade.

“It’s a reasonable note,” he said.

“QQQ may have limited upside, so the 48% cap is actually fine. On the downside, even if we get in a really bad bear market, the barrier should be deep enough.”

Investors may outperform on the downside up to a 40% decline and market perform on the upside up to the 48% cap.

“Having such a wide spread in this volatile market should be fine. The spread is wide enough to account for the worst-of. A 40% downside protection is huge. And if you stay within that range, not only do you get the protection but also the absolute return,” he said.

The combination of the dual directional and worst-of features can be advantageous if the worst-performing asset is negative.

Investors in worst-of notes are penalized on the upside since they miss the exposure to the best-performing underlier. On the downside, however, a worst-of with absolute return produces the opposite effect, he explained.

“If the market is down, as long as you don’t breach the barrier, you’ll get a better return with the worst-of,” he said.

For Chisholm, it did not matter whether the note was bearish or bullish.

“The whole point is that you don’t have to make that decision,” he said.

Bearish on both

Scott Cramer, president of Cramer & Rauchegger, Inc., said the main problem with the note was the worst-of payout.

“You could get a pretty good deal if you were to use this note with either one of these underlying. But I don’t like them together,” he said.

“It looks like some form of pair trading, but these two ETFs are not correlated to each other; that’s the problem.

“If you want this exposure, do it separately and hedge it.”

The notes showed a bearish bias since the real alpha could only be found on the downside, he said.

“If you’re bearish on both of these, the note would be a good choice. The upside with a 48% cap is attractive too, so you could be bearish and still do well it if you’re wrong,” he said.

Room for more upside

Regional banks went through a turbulent time last spring after the failure of Silicon Valley Bank and Signature Bank followed by the sale of First Republic Bank to JPMorgan last month. But since early May, the ETF share price has increased.

“The regional banking ETF has a reasonable amount of room to run. The banks that got in trouble had problems of their own. It’s not like there is systemic risk within this industry,” he said.

There may be less “room to run” for the QQQ, which has gained 37% year to date. But the sentiment among investors remains bullish.

“QQQ could continue to run, or it could fizzle out in the next 10 minutes,” he said.

“If I was bullish, I would play those funds separately. If I was bearish on both, I could look at this note.”

For that reason, Cramer said he would not be interested in the product.

“My bias is bullish on both of them.”

Irrelevant terms

For other advisers, the trading style of the notes would not meet the requirements of a conservative portfolio.

Carl Kunhardt, wealth adviser at Quest Capital Management, showed no interest for that reason.

“I don’t like the note. I’m not a broker but an asset allocator. As an asset allocator, what is the point of this security? What value does it bring to my investment strategy?” he said.

“You are betting on the Nasdaq and the regional banks. It’s a worst-of. For a worst-of to succeed, you need a fair amount of correlation between the assets. There is really no correlation between those two. One is on the momentum side of the equation, the other, on the value side. It is more of a gamble than an investment.”

For Kunhardt, the note was more bearish than bullish, which was another downside.

“I’m betting against the market. Nobody knows what the market is going to do by the end of this week let alone two years from now.

“Even if the terms of the notes are good – and they are – it’s a moot point for me. I don’t have any use for it in my portfolio,” he said.

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the agent.

The notes will price on June 16 and settle on June 22.

The Cusip number is 17291R6S6.

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