HSBC’s PLUS with 3x leverage on Alerian MLP offer aggressive bet on energy infrastructure

By Emma Trincal

New York, Oct. 26 – HSBC USA Inc.’s 0% Performance Leveraged Upside Securities due Feb. 5, 2019 linked to the Alerian MLP exchange-traded fund offer an attractive upside for bullish investors in the energy infrastructure sector, a financial adviser said. As a tradeoff, investors will be exposed to any losses.

The payout at maturity will be par plus triple any gain in the fund, up to a 45% cap, according to an FWP filing with the Securities and Exchange Commission.

The Alerian MLP ETF tracks the return of the Alerian MLP Infrastructure index.

Hedge

“This is a non-correlated asset class, which is very interesting,” said Steve Doucette, financial adviser at Proctor Financial.

“Nice upside but no protection. So the question is: do I need to worry about the downside?” added Doucette.

“It’s a very volatile asset class, we know that. But it’s also completely non-correlated. Do I need downside protection? Well maybe not, just because of the fact that it’s not correlated to the market. I’d have to do more research but this could work as a hedge for a small portion of the portfolio. Obviously you’re not going to put all your money in there.”

Outlook

The fund, which is correlated to the price of oil, went through a severe bear market as oil did between the summer of 2014 and February 2016, during which it lost 58%. Since then the ETF share price has regained 23% but its value has fluctuated up and down. This year the fund is down 16.75%.

The three times exposure was attractive, Doucette said.

“If you’re a bull and get three times up with 45% after 15 month, it could be a heck of a take,” he said.

“Even if you’re only slightly bullish you can outperform the ETF.

“As long as you’re bullish, you’re not taking more risk than in the fund directly.

“You could look at it as an interesting speculative play.”

Oil

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said he likes infrastructure because he is bullish on industrials in general. But he said the relationship between oil and energy infrastructure needs a close watch.

Energy infrastructure MLPs own, operate and build energy infrastructure assets such as pipelines, storage facilities and processing plants.

“It’s very correlated to oil obviously,” he said.

“As oil prices stabilize, infrastructure is a good play. You’ll see more demand for shipping oil from place to place.

“I’m bullish on infrastructure. However I’m neutral on oil.”

Medeiros does not anticipate a lot more upside in the price of oil. As such the cap is not much relevant.

“I’m fine with the cap,” he said.

One risk would be to see oil prices moving down within their current range.

“Right now oil is around $52 a barrel. We’re not going back to $102 at all. We think we’re pretty close to the top of the range and that oil will continue to trade between $35 and $55,” he said.

If oil, and therefore, closely related to the commodity price, the ETF were to rise only modestly, investors in the note could take advantage of the return enhancement.

“The three times leverage if we only see incremental price appreciation could be very beneficial,” he said.

Overall and based on his outlook, Medeiros was not sure he would recommend the notes for his clients.

“I’m sort of neutral on this trade,” he said.

HSBC Securities (USA) Inc. is the agent with Morgan Stanley Wealth Management handling distribution.

The notes will price on Oct. 31 and settle on Nov. 3.

The Cusip number is 40435H327.

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