Russell 2000 volatility eyed by investors; Eksportfinans ETF-linked notes offer opportunity

By Sheri Kasprzak

New York, Aug. 28 - Recent structured products offerings linked to the Russell 2000 index may give more attractive terms to investors than products tied to an index like the S&P 500 due to the current volatility in the Russell 2000, said Suzi Hampson with Future Value Consultants in London Friday.

During the week, HSBC USA Inc. said it priced nearly $5.5 million in buffered market participation notes linked to the Russell 2000 index, and Bank of America Corp. said it plans to sell two offerings of Strategic Accelerated Redemption Securities through Merrill Lynch & Co.

"This is a fairly common underlying in the U.S. market," Hampson said in an interview.

"At the moment, I believe that the volatility of this index is greater than that of the S&P 500, which as far as terms go for a capital at-risk product like this, mean that issuers are able to offer much more attractive terms to investors," Hampson said.

"On the other hand, as far as downside risk is concerned, the higher volatility of the Russell 2000 does mean that the product will most likely score higher on our risk map, indicating there is a higher chance of loss to capital."

HSBC, B of A plan deals

The HSBC notes have a two-year term. Assuming the reference return is greater than or equal to zero, the notes pay the lesser of the principal rate plus par times the reference return times the 200% upside participation rate and par plus the principal times the 43% maximum cap.

If the reference return is less than the 10% buffer, investors receive par at maturity.

If the reference return falls below the buffer, investors receive the principal amount plus the principal amount times the reference return plus 10%. The reference return is equal to the final level minus the initial level divided by the initial level.

The initial level is 584.02.

Bank of America announced plans to sell two issues of Stars linked to the index through Merrill Lynch.

The two-year notes pay a call premium of between 10% to 14% if the final value of the index is greater than the initial value at maturity.

If the notes are not called prior to maturity, the notes pay a one-to-one downside loss.

On Thursday, the index closed down 0.25 to end at 583.77.

Eksportfinans' ETF notes

Elsewhere during the week, Wells Fargo Securities LLC priced $7.76 million in access securities for Eksportfinans ASA linked to a basket of exchange-traded funds that included the SPDR Trust, Series 1; the iShares MSCI EAFE index fund; the iShares Russell 2000 index fund; and the iShares S&P MidCap 400 index fund. The basket was equally weighted.

"We do see a lot of structured products linked to ETFs," Hampson said.

"This is probably due to the fact that often the ETFs are more liquid, and therefore more cost effective, for the issuer to structure products around than the actual index they are attempting to track."

The ETFs linked to the Eksportfinans notes provide a wide selection of stocks, Hampson noted.

"So, I would say that an investor would not necessarily have a particular interest in these funds, but [rather] want to invest in worldwide equity," Hampson added.

"By choosing to invest in the basket rather than a particular ETF, it makes the product more general and global, whereas those investors looking for a particular market may choose another product or...fund. The structure offers the investor some level of protection through the buffer, so this is likely to be the appeal of this product, as opposed to dividing up their investment between the...funds directly."

Notes linked to iShares, SPDR

The 18-month access notes from Eksportfinans are linked to an equally weighted basket of exchange traded funds, including the SPDR Trust, Series 1; the iShares MSCI EAFE index fund; the iShares Russell 2000 index fund; and the iShares S&P MidCap 400 index fund.

The notes pay par times the percentage increase in the value of the basket, subject to a maximum payment of $160 per security. If the final basket is less than the initial level at maturity but less than the 85% buffer level, the investors will receive par at maturity.

If the final basket level is less than the buffer level, investors will receive 1.17647 times the principal amount.

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