Deutsche Bank's digital notes linked to SPDR S&P Homebuilders offer less appeal to big bulls

By Emma Trincal

New York, Aug. 20 - Deutsche Bank AG, London Branch's 0% digital optimization securities due Sept. 5, 2013 linked to the SPDR S&P Homebuilders exchange-traded fund, despite having a high digital return, offer little appeal to some bulls who want nothing short of an unlimited return on the U.S. construction sector.

If the ETF finishes at or above the initial share price, the payout at maturity will be par of $10.00 plus a digital return that is expected to be 18.5% to 19.5% and will be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

If the ETF falls, investors will be exposed to the decline.

"I am familiar with the homebuilders' index and I like it. I like the general concept of it," said Michael Kalscheur, financial adviser at Castle Wealth Advisors.

The ETF seeks to replicate the S&P Homebuilders Select Industry index, which represents the homebuilders industry group of the S&P Total Markets index.

"The homebuilders industry got pummeled five years ago. It rode a huge wave through the boom and then went completely bust. But it has caught on fire since the last summer," Kalscheur said.

The ETF is up 32% year to date. Over the past 12 month, it has surged by 75%.

Risk versus return

"It obviously has a huge upside potential. So far this year, it's up almost three times as much as the S&P 500," he said.

"I am a pretty big bull on this particular sector. It's a great holding to have as a direct equity investment."

Kalscheur said that he owns the Fidelity Select Construction & Housing actively managed fund with a fee of slightly less than 1%.

"We've been pretty happy with it," he said.

Kalscheur admitted that the note upside is attractive. But he is not interested in the risk/return profile.

"The note can give you 19% in a year. That's a pretty good return. If you're up 1% or even zero, you can get 19%. That's pretty impressive," he said.

"But this is only good if you believe that performance will be average. In my case, I prefer not to have a cap, especially if my downside is not protected. I like the sector a lot. If we get good economic data, I don't see why the index couldn't be up another 20% to 30% a year from now. If you believe in the market, if you think this housing rally has legs - as I do - the notes are not for you. You are giving up some upside potential and you're not getting any downside protection in addition to the 2% fee that they are taking out."

With a different risk profile, the note may have been of interest to Kalscheur.

"I am a big bull on this particular part of the market. The whole premise of me buying a structured note is to reduce risk for my clients. I would probably buy the index outright or a sector fund. In fact, I have with the Fidelity fund. If the market is up 20% six months from now, a fund will let you sell and manage your risk. But with this, you're giving up flexibility," he said.

"If this was the S&P 500 or a broad market index, you'd be crazy to pass up this note. But this is a sector fund, and I happen to be too bullish on this particular market."

Bull momentum

Kalscheur is not alone in being bullish on the housing market.

Peter Rup, chief investment officer at Artemis Wealth Advisors, did not comment on the fund or the note, but he said that the homebuilding industry has been rebounding since its lows. Part of it has to do with financing factors, not just the lower mortgage rates but also a more flexible approach from financial institutions, he said.

"The sector is improving," Rup said.

"You can see banks starting to lend into the real estate sector. Baby boomers' children need their own places to live and as a result, demand for multi-housing facilities has been rising.

"In addition, financing conditions are much better. The loan-to-value not so long ago was 65% to 70%. Now it's more like 80% to 90%. The difference was a financial void not being met. Now the banks are starting to make their lending terms more accommodating."

A loan-to-value ratio is the percentage of a home's value that is mortgaged.

"As housing prices are stabilizing, banks are becoming more aggressive. This is all positive. It will add 2% of GDP in the second half of this year. I am bullish on the sector," he added.

Another positive factor driving the recovery is the fact that private equity and hedge funds are providing mezzanine capital to property owners.

"It's another source of financing while at the same time the banks are getting more lenient, dropping further their lending standards," he said.

UBS Financial Services Inc. and Deutsche Bank Securities Inc. are the agents.

The notes will price Aug. 28 and settle Aug. 31.

The Cusip number is 25154X421.

© 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.