Barclays’ buffered SuperTrack notes with cap tied to S&P 500 offer defensive, short-term play

By Emma Trincal

New York, Dec. 19 – Barclays Bank plc’s 0% buffered SuperTrack notes due Jan. 15, 2020 linked to the S&P 500 index allow mildly bullish investors to get leveraged exposure to future gains while including a buffer over a relatively short period of time.

The notes however were not designed for bullish investors seeking higher returns in continuation of this year’s performance, which saw U.S. stocks soaring and benchmarks frequently breaking new record highs.

The payout at maturity will be par plus double any index gain, up to a maximum return of 19.55%, 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 index falls by up to 10% and will be exposed to any losses beyond the 10% buffer.

Play defense

Tom Balcom, founder of 1650 Wealth Management, said the notes offered some protection to investors wanting exposure to a highly valued U.S. equity market in an attempt to strike a balance.

The notes however were unlikely to appeal to aggressively bullish investors.

“You’re giving up 2% a year in dividends. But you’re getting two-times leverage,” Balcom said.

“The question is whether the cap on your return can match your expectations.

“If you’re bullish you wouldn’t buy the notes. The cap would be too low.

“But then some people imagine that the S&P is going to be up 20% for a long time. We think it’s time to be defensive, not offensive.”

The Dow Jones hit an all-time high 70 times this year, according to MarketWatch, he noted.

“It’s getting expensive to buy high caps in this environment,” he added.

“I’d love to have a bigger buffer and a higher cap but Barclays’ can’t be doing much better than that.

“They’re trying to offer decent levels on both sides of the equation.

“But they’re kind of hamstrung.”

Positive side

Steven Foldes, vice-chairman at Evensky & Katz / Foldes Financial Wealth Management, said it upfront: “I don’t like the note,” pointing to the cap.

There were attractive features however. Among them, Foldes cited the credit of the issuer as well as the short tenor.

But there was more.

“I also like the fact that you’re getting two-times leverage plus a 10% buffer. A buffer is always nice.”

The only real issue was the maximum return level.

Low cap for bulls

Foldes, who is bullish on equity both in the U.S. and international markets, was not satisfied with a cap that is the equivalent of an 8.55% annualized compounded return.

“Having this cap is too low,” he said.

“I’m not suggesting I know what’s going to happen. But certainly if you had done this note two years ago capping it at 19.55% for the two year wouldn’t be great. The index is already up more than that just for the year.

“You would have done your clients a disservice.

“Your return is not even above the 10% a-year historical return for the S&P 500.”

He admitted that it was “close.” But in a market trending higher, selecting the right cap was very important for clients. Ideally, Foldes said he prefers not having any cap at all.

“If you’re optimistic as we are about the economy with the new tax code and the economic boost it’s going to create, capping out a major asset class at 10% a year would be very difficult for clients,” he said.

The S&P 500 index has been on a bullish trend through the year fueled by the prospect of a new tax reform, good earnings and a stronger economic growth. For some advisers such as Foldes, the outlook remains positive for 2018.

The large-cap benchmark is up about 20% so far this year. Its average rate of return has been 18% a year over the past five years.

“If things continue that way you’re really not helping your clients by capping them out so low,” he said.

Pricing restrictions

Foldes said he understood that the cap level reflects the low volatility of the S&P 500 amid a strong year-end rally.

Besides, volatility has been at record low levels almost throughout the year.

Similar deals from other issuers with the same terms offer higher caps. But these products are linked to more volatile underliers.

For instance, Credit Suisse AG plans to offer the identical structure – two-year term, 2x leverage and a 10% buffer on the iShares MSCI Emerging Markets fund with a 29% cap.

GS Finance Corp. is also showing notes with the same terms. The only difference is the underlying asset (MSCI EAFE index) allowing for a cap of 24%.

“Even those caps would not be enough for us given the performance of those assets,” he said.

Foldes noted that the few times he would tolerate a cap would mean he is getting at least 20% a year.

“I know getting a two-year note on the S&P with a 20% is not going to happen,” he said.

“You can’t get it.”

Agreeing to longer maturities is always an option for investors seeking higher caps. But Foldes likes to keep his notes below two years.

Long only

Because the pricing of caps has become challenging for issuers and disappointing for investors like him, Foldes said he has increasingly been moving some of his assets into ETFs and reduced his structured notes notional.

“For a few basis points, we’ll get the benefit of the full upside without having to worry about not getting the dividends and being capped out,” he said.

“We understand that we’re not getting the buffer. But a 10% protection isn’t all that much.”

The notes may be more appealing to another kind of investor, he noted.

“If you believe the market will be range bound...somewhere between modest losses and modest gains ... then the notes would be suitable.”

Barclays is the agent.

The notes will price on Dec. 22.

The Cusip number is 06744CPA3.

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