UBS’ $38.03 million of digital notes on index basket designed for short-term bullish play

By Emma Trincal

New York, May 11 – UBS AG, London Branch’s $38.03 million of digital basket-linked notes due May 2, 2024 linked a weighted basket of indexes provide a wide spectrum of potential outperformance on the upside, but investors must be confident enough to accept the risk on the downside, sources said.

The basket consists of the Euro Stoxx 50 index with a 36% weight, the Topix index with a 29% weight, the FTSE 100 index with a 16% weight, the Swiss Market index with an 11% weight and the S&P/ASX 200 index with an 8% weight, according to a 424B2 filing with the Securities and Exchange Commission.

If the basket finishes flat or gains, the payout at maturity will be the greater of par plus the basket return and par plus the 29% threshold settlement.

Investors will be fully exposed to any basket decline.

Non-U.S. basket

“My only hesitation here is with the indices,” a financial adviser said.

“Everybody knows the S&P or the Dow, even the Euro Stoxx. But the Topix or the FTSE, that’s something else, let alone the Swiss and Australian benchmarks. We don’t have as much historical data on these indices. I don’t follow them as much. I guess you could see the basket as a mini EAFE index. But in that case, I prefer getting exposure to the ETF directly.”

The MSCI EAFE index is a benchmark for developed markets outside of North America. It references “EAFE” countries, which stands for Europe, Australasia and the Far East.

An equally weighted basket would have perhaps been preferable for this adviser.

“Equal weight would simplify things,” he said.

This adviser however said he liked the structure of the notes.

Bullish bet

“It’s an at-the-money digital giving investors a big boost – 29% on two-year, that’s a lot. You get unlimited upside if the underlying closes higher, which is really good too,” he said.

The term at-the-money means that the strike price for the digital option is at the same level as the initial price, or “at-the-money” price.

“We ourselves do a lot of those at-the-money digitals, capped and uncapped. We like them,” he said.

Other digital notes are structured with “in-the-money” digital options. In those deals, the digital payout is triggered at a strike situated below the initial price. Since the initial price is above the strike, the call option is “in-the-money.” Barrier level and digital strikes are usually one and the same.

“This one has no barrier. It’s a pure bullish play,” he said.

“You’re not getting any downside protection. You’re trying to express a broad bullish outlook. The indices are going to be up, you just don’t know by how much.”

With a payout of nearly 30% in two years, investors have a wide margin of error, he noted, which increases the chances of outperforming the underlying if the final price is positive.

UBS platform

This adviser said he was not surprised by the size of the offering.

“It’s UBS. Their wealth management unit is huge. They are working on putting out bigger deals. They want to raise the level of education and adoption. They’re in the process of bringing more salesforce in the field. I know they’re trying to get more active,” he said.

Diversifying the portfolio

A market participant said the notes could help advisers in their asset allocation process.

“It’s an interesting note as a replacement for a mutual fund or ETF that gives you exposure to non-U.S. developed countries. It’s some sort of an EAFE ETF in a basket format,” he said.

“They give you almost 30% plus the upside. It seems pretty compelling to me.

“And what are you giving up for that? Basically two years’ worth of dividends. It seems like a fair tradeoff.”

The full downside exposure sets the product apart, he noted.

“This is not the usual format.

“I would compare it to those very short-term, highly leveraged notes. Some sort of variation on the 14-month or two-year accelerated return note paying 3x up and 1x down,” he said.

Pricing

Increased volatility levels helped the pricing of the notes, he added.

“You really benefit if the basket is up less than 29%. When volatility is high, the probabilities of a return greater than 29% are higher. Volatility is not just about stock prices falling sharply. It’s about how much the price is going to move whether up or down. If volatility is high, the price may rise above the digital level, which takes the benefit of the notes away from you. That makes the digital option cheaper and the pricing more compelling.”

UBS Securities LLC is the agent. Simon Markets LLC is acting as dealer.

The notes settled on May 5.

The Cusip number is 90279D4E3.

The fee is 2%.

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