JPMorgan’s buffered leveraged notes on index, ETF offer uncapped gains over short-term play

By Emma Trincal

New York, April 27 – JPMorgan Chase Financial Co. LLC plans to price 0% uncapped buffered return enhanced notes due May 3, 2023 linked to the lesser performing of the Euro Stoxx 50 index and the iShares MSCI EAFE exchange-traded fund combine uncapped leveraged exposure over a two-year maturity, which is uncommon since most leveraged returns with unlimited upside come with extended maturities, advisers said.

If each asset finishes above its initial level, the payout at maturity will be par plus 1.92 times the gain of the worse performing asset, according to a 424B2 filing with the Securities and Exchange Commission.

If the lesser performing asset falls but by no more than 5%, the payout will be par.

Otherwise, investors will lose 1% for each 1% decline of the worse performing asset beyond 5%.

Correlation

Steven Foldes, vice-chairman at Evensky & Katz / Foldes Financial Wealth Management, said the offering was attractive.

“We like it for a number of reasons. First, the correlation between those two asset classes is very high,” he said.

With worst-of payouts, the higher the correlation between the underliers, the lower the dispersion risk.

Indeed, the two underlying display a high coefficient of correlation of 0.979 on a scale of zero to 1.

“Also, a two-year note is quite short. We like that. And we like the issuer’s creditworthiness. JPMorgan is a very solid institution,” he said.

“The 1.92 times is outstanding for a note that’s only two years long with two underlying that are so close to each other.”

Protection, value

Foldes also found the protection helpful despite its small size.

“The 5% buffer is just icing on the cake. There’s always a possibility that these two benchmarks might be lower especially on a relatively short tenor. So having the buffer is very compelling. It brings a little bit more safety to the note. If it were a five year, it wouldn’t be necessary.”

The short maturity also helped lessen the opportunity cost of not receiving dividend payments, he noted. In addition, the 1.92 leverage factor offset such cost,” he added.

The underlying investment theme was compelling as well.

“Both the EAFE and the Euro Stoxx are part of a global diversified portfolio. We own both. We like them both because they have underperformed the U.S. over the past two years,” he said.

“At least you’re not buying something that’s widely inflated in terms of pricing.

“This is a very attractive offering.”

Less capital outlay

Jerry Verseput, president of Veripax Wealth Management, said he has been looking for leveraged notes lately. The deal responded to some of his requirements.

“Both underlying have about 2% dividend yields. The 1.92x more than makes up for that,” he said.

“It’s a great way to get exposure to developed foreign stocks. You only have to devote about half your capital because you’re getting 2x leverage or close to 2x leverage.

“If you want to be long the stocks in this asset class, it’s a great vehicle.”

In the current market environment, Verseput is looking for growth with risk mitigation.

“We like leverage at this point. We don’t want to be long equities without some kind of buffer even if it’s just 10% or even 5%,” he said.

Diluted dollars

In his view, it makes sense to be cautiously bullish over a relatively short time horizon.

“We need to be long this market. If the U.S. keeps on printing money, it’s going to take more dollars to buy the same amount of stocks. When the U.S. dollar is worth less and when it takes more currency to buy the same number of shares, as long as you have this pattern, the market will go up,” he said.

“That’s why I like these leveraged notes. You’re only putting a portion of your capital at risk and you get the leveraged exposure.”

Short-term window

Eventually the negative impact of printing money will be felt, he said.

“We are getting close to the breaking point. The U.S. dollar won’t lose its reserve currency status immediately. There is room for growth in equities in the short term even though we’re already seeing signs of asset inflation. Just compare for instance the rise in Apple’s share price with the growth of its earnings.

“Enhanced return notes are a good way to position yourself during this transition period, if you keep the maturity short.”

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes will price on April 28 and settle on May 3.

The Cusip number is 48132TVT0.

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