Barclays’ capped buffered notes on Russell 2000 index have a ‘cap’ problem, advisers say

By Emma Trincal

New York, Dec. 17 – Barclays Bank plc’s 0% capped buffered notes due Jan. 21, 2022 linked to the Russell 2000 index provide a large buffer. But for advisers bullish on the small-cap benchmark, the price to pay for the protection seems too high, not only because it requires sacrificing the leverage but mostly because it lowers the cap too much, they said.

The payout at maturity will be par plus any gain in the index, up to a maximum payout of par plus 10%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 24.25% and will lose 1% each 1% decline beyond the 24.25% buffer.

The final underlying value will be the average of the closing levels on Jan. 11, 2022; Jan. 12, 2022; Jan. 13, 2022; Jan 14, 2022; and Jan. 18, 2022.

Defensive profile

“It’s almost like a bearish note. You’re betting on a pullback with a 24% buffer and you’re capped...you’re not getting the full upside,” said Steve Doucette, financial adviser at Proctor Financial.

“I like the buffer in case things get ugly. But you’re really limiting your potential gain.”

Doucette said he was confident the small-cap index should rise during the period.

“I’m bullish on an underperforming asset class. Am I bullish on the overall market? That remains to be seen,” he said.

Mean reversion

“Small-caps were lagging the large-cap indices. Now they’re screaming back since the last couple of weeks. They’re still far behind large-cap stocks with all this momentum.

“Who knows where they’re going to be in 13 months?”

The Russell may be much higher than 10% as the economy recovers, he said.

“You want to catch some of the upside,” he said.

Raise it or kill it

The trade-off in the notes consists of giving up the leverage for a competitive buffer amount on the downside. The cap is what allows the issuer to price the buffer.

Doucette said he would prefer to see a different type of trade-off.

“I would be willing to give up some of the buffer in order to raise or better, to eliminate the cap,” he said.

“The question is: how much buffer can I still get in eliminating the cap?”

If it is not much, Doucette may consider extending the maturity.

“We like to go out a little further because you can get better terms,” he said.

“But as always with these notes, timing is what it’s all about.”

In conclusion, the cap was a stumbling block.

“I wouldn’t consider this note. Even though it limits your risk, you’re paying too much for that protection,” he said.

“You’ll be easily capped out. You don’t want to restrict your upside to 10% with this asset class. You could be leaving a lot on the table.”

Not the best timing

Matt Medeiros, president and chief executive of the Institute for Wealth Management, held a similar view.

“It’s a pretty straightforward note. But I don’t like the cap,” he said.

Comparing the notes’ trade-off with having a higher cap and less protection, Medeiros said he would prefer a more bullish structure.

“To cap yourself in order to get this large buffer is not ideal in this particular situation. I don’t think the timing is right,” he said.

“We will be seeing a rotation in the market away from large-caps to small-caps. In fact, it’s already happening.

“Large-caps, Nasdaq are way out ahead of themselves. We’re moving into value stocks. People don’t want to buy overpriced markets. So, I think the Russell is going to benefit from this trend.

“It’s the cap that’s the problem here, especially for the next 13 months,” he said.

“I like the idea of a buffer. But for that short period of time, I’m not pessimistic. So why would I want so much protection when I expect a reasonably high return?”

J.P. Morgan Securities LLC and JPMorgan Chase Bank, NA are the agents.

The notes were expected to price on Dec. 17 and to settle on Dec. 22.

The Cusip number is 06747QTK3.

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