Barclays’ $2 million buffered SuperTrack notes offer unleveraged, capped play on four indexes

By Emma Trincal

New York, July 27 – Barclays Bank plc’s $2 million of 0% buffered SuperTrack notes due Jan. 26, 2022 linked to the lesser performing of the Russell 2000 index, the Nasdaq-100 index, the Dow Jones industrial average and the S&P 500 index offer a solid buffer over a short-term duration. But the worst-of exposure to four indexes or the cap level were seen as shortcomings by advisers.

The payout at maturity will be par plus any gain of the worse performing index up to a maximum return of 27%, according to a 424B2 filing with the Securities and Exchange Commission.

If any index falls by up to 20%, the payout will be par.

Otherwise, investors will receive par plus the return of the worse performing index plus 20%.

Terms

Carl Kunhardt, wealth adviser at Quest Capital Management, said he liked the terms but not necessarily the worst-of exposure to four indexes.

“I like the tenor. In general, I hate to be locked in. The 18-month is fine because you can’t get much shorter than that for this type of note,” he said.

The notes offered a sound downside protection, he added.

“20% is clearly a generous buffer.”

Even the 27% cap was acceptable based on his market outlook.

“You’re unlikely to get more than that anyway, especially if it’s the worst of four indices.”

Too many underliers

But Kunhardt objected to the use of four indexes in the worst-of payout structure.

“Even though they’re correlated, four is a little bit much,” he said.

“It makes it complicated for the client and for me.

“I have to do my due diligence four times and I have to do the explaining four times.”

Many of Kunhardt’s clients have discretionary accounts, which allows him to buy and sell securities on their behalf. But investors still need to understand the product, he said.

“In the case of derivatives or alternative investments, you have to send them the offering documents prior to the trade. It’s not a traditional investment. You have to explain it. This is certainly not something easy to explain to a client,” he said.

Risk budget

In addition, the worst-of, especially on four assets, will make the risk harder to plan for and manage since it is impossible to know in advance what index the client will be exposed to.

“You have to run different scenarios based on your outlook on what’s going to be the worst-of. And what will be driving the performance of each index will be a function of your view. It will depend on whether you believe that we’re getting out of a correction or sliding into one.

“Typically, small-caps lead into a correction. They also lead you out of it,” he said.

But the introduction of the Nasdaq in the mix brought more uncertainty.

“You also have the Nasdaq, which has a bunch of mega-cap stocks in it. It’s also the most volatile of all four.

“How do you run your simulations when you don’t know what index you’ll end up being tied to?

“I understand they had to put four indices in there to be able to offer better terms. But it makes it complicated.

“You’re dealing with a note that’s taking 20 minutes to figure out and 20 minutes to explain to the client.

“That’s the problem,” he said.

Single index preferred

Kunhardt said he can find attractive alternatives with a single underlier.

“I’ve shown six structured notes last week to a couple of dozen clients. The inventory is there,” he said.

On Friday, he bought some 18-month notes from UBS AG London Branch linked to the Dow Jones industrial average. The payout is 1.5 times any index gain up to a 15% cap and a 10% buffer on the upside.

“The cap is not very high, but I don’t care. I’m not expecting high returns from the market,” he said.

Credit, cost

Steven Foldes, vice-chairman of Evensky & Katz / Foldes Financial Wealth Management, on the other hand is bullish for the next 18 months. To him the 27% cap in the Barclays’ 18-month note was insufficient.

He first pointed to some positive elements of the deal.

“I have no problem with Barclays’ credit,” he said.

“The fee is not out of line, which is also good.”

The fee is 0.5%, according to the prospectus.

Cap

The number of underlying indexes used for the worst-of exposure surprised him.

“It seems a little bit unusual. I don’t think I’ve seen four underlying in a worst-of. I’ve seen two or even three, but four seems like a lot.”

But this was not a major problem.

“Those four U.S. equity benchmarks are highly correlated to one another, so this is not really an issue.

“A 20% buffer is nice especially since it’s a hard buffer. We’re still in uncertain territory in terms of Covid,” he said.

But the 27% cap was disappointing, he said.

“A 27% cap on a worst-of isn’t very competitive.”

Vaccine, Elections

Foldes is inclined to be bullish over the next 18 months because a lot of the uncertainty and volatility felt currently are likely to disappear during that timeframe.

In particular, he is confident a new anti-coronavirus vaccine will be found and made available before the notes mature.

“It looks like we now could see a vaccine in the next six to nine months. We already have three phase 3 trials from different companies.

On Monday, Moderna announced it began its final stage testing for a vaccine based on 30,000 people, expecting results to come by November.

BioNTech SE, in collaboration with Pfizer is also developing a vaccine.

Johnson and Johnson has announced early stage human trial for a Covid-19 vaccine as well.

On the therapeutics front, Gilead earlier this month released data showing positive results for its anti-Covid-19 drug remdesivir.

No cap

“With all those potential vaccines against the coronavirus, we could have a very strong year in 2021,” he said.

“There may be some optimism if we have a new administration as well. The markets operate on a sentiment-basis.

“The perspective of a new administration, just like the Election of Franklin Roosevelt in 1932, could bring enthusiasm and confidence in the market.

“With a Democratic administration, we may have more stimulus, which would boost demand. Consumer demand is 75% of GDP.

“For all those reasons, I don’t want to be capped at 27% 18 months from now.

“I’d like to see this cap disappear and possibly add some leverage even if it means in exchange, giving up the buffer,” he said.

Barclays is the agent.

The notes priced on July 21 and settled on July 24.

The Cusip number 06747QB97.

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