CIBC’s notes tied to iShares MSCI EAFE ETF mitigate risk on developed markets

By Emma Trincal

New York, Aug. 11 – Canadian Imperial Bank of Commerce’s 0% market-linked securities with leveraged upside participation to a cap and fixed percentage buffered downside due Sept. 6, 2019 linked to the iShares MSCI EAFE exchange-traded fund give investors leveraged exposure to developed countries with reduced risk on the downside. The structure may encourage skittish investors who want to allocate to this broad asset class but remain cautious, a buysider said.

The payout at maturity will be par plus 175% of any fund gain, up to a maximum return of 30% to 35% with the exact cap to be set at pricing, according to a 424B3 filing with the Securities and Exchange Commission.

Investors will receive par if the fund falls by up to 10% and will lose 1% for every 1% decline beyond 10%.

Courage

“If you’re trying to get access to a market like the EAFE but are nervous to do it, doing it through the buffer is a great alternative. It gives you access. It also gives you the courage to do it, which sometimes you need to have if you’re a long-term investor,” said an adviser at a private wealth management firm that offers structured notes to its clients.

The underlying fund tracks an index focusing on stocks from Europe, Australasia and the Far East. It represents most of the world’s developed countries at the exception of the U.S. and Canada. European markets account for more than 60% of the total.

EAFE, U.S.

So far this year, the fund’s returns are flat, underperforming the S&P 500 index by nearly seven percentage points.

For the past year, the EAFE ETF was down nearly 9% while the U.S. index was up by more than 5%.

The lackluster returns of the fund along with a heavy weight in the U.K – which represents nearly 20% of the total – may cause investors to hesitate before buying the ETF, he said.

Yet, the performance of the ETF has strongly bounced back lately, showing more than 5% in gains in just the past month, or twice more than the S&P 500 index.

“You may want to buy it but you can be unsure about the index. That’s a great way to participate with leverage on the upside,” he added.

“I like the 10% buffer. For a three-year, I think 10% is enough,” he said.

Cap

What this adviser liked less was the cap.

“It seems a little bit low. For the EAFE, I think you can get a little higher.”

This investor said he saw a note tied to the same index offering 1.5 times leverage, a 15.8% cap and a 10% buffer on a 13-month. But the pricing was done two months ago.

“I don’t know how much the market changed since then. But it was a 13-month. Looks to me that on a three-year, you may be able to get a little bit more on the upside. I’m not totally sure though.”

Now is the time

Steve Doucette, financial adviser at Proctor Financial, said he would like to get more on the downside.

“We like international equity. We have a large position in the EAFE. Some clients have complained because it hasn’t done so well compared to the U.S. going through the roof. We’re telling them: now is the wrong time to get out of it,” he said.

Doucette said he likes to have in his portfolio some of the underperforming asset classes as prices may revert to the mean. Highly valued markets on the other hand, such as the U.S., pose more risk.

“From a straight valuation perspective, at least you have reasonable P/E levels. We’re going to keep our allocation as it is.”

Buffer

Doucette said the cap was attractive. But he was unsure whether the buffer amount would be sufficient to protect investors in the next market downturn.

“As we hit new market highs nobody is going to complain about 10% a year. But as the bull cycle continues to go on, we know the bear is going to come at some point,” he said.

“Is this 10% buffer going to be enough? I would look for a little bit more downside protection.”

He would be willing to give up some of the leverage in order to reach that goal. But at the same time, he would try to maintain the cap.

“That way if the market comes back, you still have a decent return.”

Coming due

The adviser said he is “looking to” roll over a similar note also based on the EAFE index.

“It’s not due until February. But we want to get 1.25 to 1.4 times leverage and reset the protection. We’re trying to capture 15% to 25% protection level through a buffer.”

Wells Fargo Securities, LLC is the agent.

The notes will price on Aug. 31.

The Cusip number is 13605WBR1.

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