TD Bank’s leveraged notes linked to ETFs offer diversified equity exposure with cap, buffer

By Emma Trincal

New York, Dec. 23 – Toronto-Dominion Bank’s 0% leveraged capped buffered notes due Jan. 4, 2022 linked to a basket of six exchange-traded funds provide a diversified portfolio that could outperform the underlier in a mildly bullish market, sources said.

The basket components are the SPDR S&P 500 ETF trust with a 50% weight, the iShares Russell 2000 ETF with a 15% weight, the iShares MSCI EAFE ETF with a 15% weight, the iShares MSCI Emerging Markets ETF with a 10% weight, the PowerShares DB Commodity Index Tracking fund with a 5% weight and the Vanguard REIT ETF with a 5% weight, according to a 424B2 filing with the Securities and Exchange Commission.

If the basket return is positive, the payout at maturity will be par plus 1.5 times the basket return, subject to a maximum payout of $1,460 to $1,510 per $1,000 principal amount of notes. The exact cap will be set at pricing.

Investors will receive par if the basket declines by up to 15% and will be exposed to losses beyond the 15% buffer.

Diversification

While not all asset classes are represented in the underlying basket, the six ETF components provide a satisfying mix, said Scott Cramer, president of Cramer & Rauchegger, Inc.

“It’s a reasonably well-constructed basket of ETFs. While it’s weighted towards equities, you still have some commodities and the REITs, which can help balance the correlations,” he said.

“It’s a good diversifier.”

Mildly bullish

The notes would outperform the underlying basket in a slow growth environment. The annualized compounded return will be between 7.85% and 8.60% based on the 46%-51% cap range. The cap may be reached if the annual return of the basket is comprised between 5.50% and 6%.

“Over five years, if you get to the cap, you wouldn’t be upset with an 8% to 8.5% return a year. The upside potential is pretty good,” he said.

Notes versus ETFs

The weakness of the structure is the protection.

“It doesn’t have a great downside protection,” he said.

But the structure offers advantages over a direct investment in the same basket.

“You would have a tougher time replicating it with the ETFs. Getting the leverage on the upside and not on the downside would be tough too,” he said.

“This is a good portfolio for somebody who wants to participate in the international market but wants some downside protection. Over five years, 15% is not great, but it’s reasonable.”

Buffer, cap

Matt Medeiros, president and chief executive of the Institute for Wealth Management, also likes the underlying basket.

“Having a diversified portfolio within a note is something I find very appealing as a core holding to an allocation program,” he said.

“The challenge I see with this particular note is the relatively low buffer in relation to the cap.”

Medeiros said that he does not particularly care for caps.

“My philosophy is that if you’re taking equity risk, you should get equity rewards,” he said.

“On a five-year, you’d better have better than a 15% buffer. You’d better have better than 20%.”

Medeiros said the cap is too low in relation to his outlook.

“You’re likely to exceed the cap. Even without leverage you’re likely to do better. Therefore you’re paying for a leverage that’s not really necessary.

“I’d rather do it a one-to-one exposure, no leverage but get a higher cap.”

TD Securities (USA) LLC and Wells Fargo Securities LLC are the agents.

The notes will price on Dec. 29 and settle on Jan. 4.

The Cusip number is 89114QYC6.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.