Bid on emerging markets resumes with Citi’s, Barclays’ leveraged notes on EM ETF

By Emma Trincal

New York, July 14 – Emerging markets are “re-emerging” in new deals recently priced after several weeks of absence.

Two issuers brought to market leveraged capped notes on the iShares MSCI Emerging Markets exchange-traded fund with slight differences in tenor and downside protection. Advisers considered the volatility of the asset class when comparing the distinct structures.

Barrier notes

The first product was a three-year barrier note with absolute return.

Barclays Bank plc priced $1.11 million of 0% dual directional trigger Performance Leveraged Upside Securities due July 6, 2023 on the ETF, according to a 424B2 filed with the Securities and Exchange Commission.

The payout at maturity is par plus 2x the index gain, up to a maximum of 23.35%. If the index declines by 20% or less, the payout will be par plus the absolute value of the index return. Beyond a 20% price drop, investors will lose 1% for every 1% that the index declines from its initial level.

Geared buffer

The second issue – Citigroup Global Markets Holdings Inc.’s $104,000 of 0% buffer securities due March 25, 2022 pays 1.5 times the gain up to an 18% cap. It offers a 10% geared buffer with a 1.111 multiple on the downside.

Tom Balcom, founder of 1650 Wealth Management, said he was more comfortable with the Citigroup’s buffered note.

“The other one has 20% but it’s a barrier. Anything can happen in three years,” he said.

“This ETF dropped from $46 to $30 in the first quarter during the pullback. It’s a very volatile underlying.

“You do want emerging markets in your portfolio for diversification purposes. But I definitely would recommend some downside protection.”

Buffer preferred

The cap for the three-year Barclays note is 7.25% on an annualized compounded basis and 8.63% for the two-year Citigroup buffered product.

“I’d rather have the buffer. You get more per annum. If the market turns south, you’re taking a big risk. This is an ETF that can go down 20%, 30% easily. It’s nice to have the absolute return but once you breach that barrier your losses can be huge,” he said.

Balcom’s preference for a defensive structure reflected his outlook on the underlying.

“I’m not very bullish on emerging markets. So, the 18% cap is fine with me.”

Tenor

Another buysider pointed to the volatility of the ETF as well but focused more on the upside risk.

“The ETF can move up and down a lot. If you’re up a lot, you could really be penalized with that low cap,” he said.

The price was just below $30 a share on March 23 at the low during the bear sell-off.

In January, the ETF was at $46.

“It dropped 35% during the collapse that we had in the beginning of the year,” he said.

“It can very quickly go down more than 20%

“So, you’re definitely taking on some risk although not as much as with the U.S. market, which is too rich.”

This buysider did not have a strong preference for a deal versus another.

“A longer period, the three-year would be better than two although if I had the choice, I’d rather go four or five years,” he noted.

Limited protection

“The three-year one has a barrier and barriers are not so great. But three-year is better than two although none of the two has enough time to rebalance after a recession,” he said.

“The two-year has a buffer. But 10% is a small amount of buffer.

“You can really lose money on either one in my opinion.”

Unwanted cap

This buysider was relatively bullish on emerging markets given how much the ETF underperformed the U.S. equity market.

“Overall, my problem with both notes is that I don’t like having my upside capped with a relatively volatile index.

“If the ETF moves up a lot you’re giving away too much.

The notes priced two weeks ago when the underlying was at $40 a share. The ETF closed on Tuesday at $43, a 7.5% increase.

“To be honest, I’m not really a big fan of either one of those two.”

The Barclays deal was distributed by Morgan Stanley Wealth Management.

Its Cusip is 06747J202.

The fee is 3%.

The underwriter for the Citigroup notes is Citigroup Global Markets Inc.

The guarantor is Citigroup Inc.

The Cusip is 17328VZ37.

Both offerings settled on July 6.

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