Barclays’ buffered SuperTrack notes tied to two ETFs may offer international equity substitute

By Emma Trincal

New York, June 4 – Barclays Bank plc’s 0% buffered SuperTrack notes due May 31, 2022 linked to the iShares MSCI Emerging Markets exchange-traded fund and the iShares MSCI EAFE exchange-traded fund offer uncapped, leveraged exposure to two broadly diversified equity benchmarks, but investors need to feel comfortable with their returns being tied to the lesser performing of the two.

The payout at maturity will be par plus 1.4 times any gain in the lesser-performing ETF, according to a 424B2 filing with the Securities and Exchange Commission.

If either ETF falls by up to 30%, the payout will be par.

Otherwise, investors will lose 1% for every 1% decline of the lesser-performing ETF beyond 30%.

Equity replacement

“I like that,” said a financial adviser.

“I’m a big fan of downside protection. If you buy a note without downside protection, what value are you adding to the client?”

While the payout was a worst of, at least the two underliers fell into the same asset class.

“It’s all about having an international exposure: developed countries and emerging markets. It’s the whole spectrum of an international equity portfolio. If you’re going to have the exposure anyway, why not use it as an equity substitute?

“It accomplishes two goals: one, the downside protection; two, the leveraged exposure.

“You wouldn’t get those features by being long the market. If you want international exposure, this is a good alternative to owning the index fund directly.”

Good tenor

For this adviser, the three-year tenor was a good compromise between what he wished his clients would hold the notes for and their need for liquidity.

“Three-year is usually what we use because our clients don’t like to go longer,” he said. The reasons may vary from the constraints of rebalancing a portfolio to the need of having available cash flow, he explained.

“The main reason people want to keep it short is because they need flexibility,” he said.

“Personally, I would love it if they went five years because you get much better terms. But five-year has its downsides too. On a five-year, the delta would be lower and it would show on the statements. Even if the index is up nicely the return on this note would be flat. People don’t always understand that it’s the final value that counts. When they see disappointing performance on their statements, you have a lot of explaining to do.”

Downside risk

A second financial adviser expressed a different view on the timeframe of the investment.

“I’m not a fan of the three-year term. We have economists predicting a recession. The market might run up for another two or three years, but it’s unlikely. I don’t like the timing at all,” he said.

In addition, this adviser said he does not particularly like worst-of payouts at this stage in the market cycle.

“I’m mainly concerned by the worst of on the downside if we hit a bear market,” he said.

“On the upside, of course you’d love to capture 1.4x leverage with no cap. But again, it’s on the worst of.

“Maybe I’d rather cap it and get the best of.”

Best-of notes enable investors to get a preferred exposure to the best-performing underlying through a higher weighting, which in some cases can be set as high as 100%.

Barclays is the agent.

The notes will settle on June 5.

The Cusip number is 06747MR65.

© 2015 Prospect News.
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