BofA Finance’s notes on Stoxx Global Select Dividend 100 show protection, missed opportunity

By Emma Trincal

New York, Sept. 9 – Advisers always like having principal protection. But not at all costs.

BofA Finance LLC’s 0% leveraged notes due Sept. 16, 2022 linked to the Stoxx Global Select Dividend 100 index seem to offer the best of growth and safety, making investing in volatile markets seem easy.

If the index finishes positive, investors will get par plus at least 185% of the index return, according to a 424B2 filing with the Securities and Exchange Commission.

If the final index level is less than the initial index level, investors will be exposed to the first 5% decline, subject to a minimum redemption amount of 95% of principal.

The upside is unlimited, and investors will not lose more than 5% of their initial investment.

What gives?

“You are giving up too much dividend,” said Kirk Chisholm, wealth manager and principal at Innovative Advisory Group.

Not thrilled

The Stoxx Global Select Dividend 100 index is composed of 100 of the highest-dividend stocks from the Americas, Europe and the Asia/Pacific region. The index yields 4.25%. By foregoing the dividends payments over three years, investors give up nearly 13% in return, he noted.

“I’m not thrilled about not getting any dividend from an index designed precisely for high yield. When you invest in high-dividend stocks, you invest for the dividends, not for the appreciation,” he said.

It’s one thing to give up dividends on the S&P 500 index, yielding about 1.8%, although it depends on how long.

It’s another to sacrifice the dividend portion of an index whose total return has been less than stellar.

The Stoxx Global Select Dividend 100 index has gained 5% over the past three years and has declined by 0.74% over the past year.

Lackluster return

“Not only you’re losing a significant dividend but you’re not going to benefit very much from the price appreciation of this index if there is one,” he said.

“It has not been moving up that much.”

Chisholm does not expect markets to be very bullish looking forward.

“I don’t see a lot of price appreciation in the global markets at this point,” he said.

“The fact that 95% of your downside is protected is nice. But in a sideways market it’s not going to be that useful. It’s certainly not worth giving up that much in dividend yield.”

For this reason, Chisholm said he did not find the deal very appealing.

Never seen before

Carl Kunhardt, wealth adviser at Quest Capital Management, also expressed discomfort with the use of this index as the underlying.

For one thing, he prefers benchmarks with more visibility.

“Every structured note is a derivative. Its performance is dependent on index,” he said

“This underlying is not a well-recognized one. Not to say I can’t get any information on it. I can. Anything Stoxx does will be disclosed on their website.

“But still. I don’t know what the algorithm does. I don’t know what the index is truly tracking. I’m rolling the dice.”

There has not been any U.S. structured note linked to the Stoxx Global Select Dividend 100 index as a sole underlier since the index inception in 2007, according to data compiled by Prospect News. The data encompasses U.S. structured notes registered with the SEC.

Too global

The allocation breakdown by region showed a weighting of about 35% in the Asia/Pacific region, which includes Australia, Japan and New Zealand; a 32% weighting in Europe and about 31% in North America, according to iShares, which offers exchange-traded funds listed in Germany and Switzerland that track the underlying.

“The fact that you’re chasing dividends is going to make this index mostly an international index,” said Kunhardt.

“We like to focus on growth. And a lot of the growth is found in the U.S.”

U.S. stocks account for 23% of the index.

“It may seem like a lot. But from my perspective, 23% is not enough for me,” he said.

“When investing in foreign markets, I like to keep those holdings separate from my U.S. allocation. This is why I don’t really like global funds,” he said.

Global funds may invest in both international and domestic stocks.

“In a global fund, they decide for you how much goes to the U.S. and how much goes international. I want to be the one who decides how much is one versus the other. I don’t want to let someone else do it for me.”

Missed returns

But Kunhardt’s main objection was also the cost of giving up dividends in a high-dividend yield index.

“When you have 0.75% in total return, you don’t want to eliminate the dividends. Subtract the 4.24% yield and you’re in negative territory,” he said.

“High-dividend stocks tend to be less volatile, more value-oriented. They tend to underperform growth, momentum stocks. Their return almost exclusively comes from the high dividend.”

He said at first, the structure looked very promising given the 95% protection on the downside as well as uncapped leverage on the upside.

“With that kind of downside protection, you’re unlikely to lose any money. What you’re going to lose though is opportunities.”

The notes will be guaranteed by Bank of America Corp.

BofA Securities, Inc. is the agent.

The notes will price on Friday.

The Cusip number is 09709TVC2.

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