Barclays' notes tied to PowerShares QQQ trust offer leveraged access to high-tech rally

By Emma Trincal

New York, April 16 - Barclays Bank plc's upcoming Super Track notes linked to the PowerShares QQQ trust offer investors with a slightly bullish outlook on technology stocks the opportunity to significantly outperform the Nasdaq 100 index but with full exposure to losses, said structured products analyst Suzi Hampson at Future Value Consultants.

The notes, leveraged and capped, are linked to the PowerShares QQQ trust, a popular exchange-traded fund that replicates the performance of the Nasdaq 100 index. The index includes 100 stocks of the largest computer, telecommunications and biotechnology companies.

The 0% notes will mature Oct. 31, 2011, according to an FWP filing with the Securities and Exchange Commission.

The payout at maturity will be par plus double any fund gain, subject to a maximum return of 12.5% to 15% that will be set at pricing. Investors will be exposed to any fund decline.

The notes are expected to price April 27 and settle April 30.

Barclays Capital Inc. is the agent.

Attractive leverage

Hampson said that one of the positive aspects of the deal is leverage, as it gives investors the opportunity to "significantly outperform" the underlying fund.

Hampson made the assumption that the cap would be set at 13.75%, the mid-point of the range.

The ETF would have to hit a 6.85% return threshold for the maximum gain to be obtained, she said.

Because the product has a one-and-a-half-year term, the 13.75% cap is equivalent to 9.167% per year, she noted.

"Without the leverage, this product would not offer much compared to a direct investment in the ETF. In fact, investing in the ETF could be cheaper. The leverage is what makes it interesting," she said.

"Your risk is similar to the ETF since you lose one to one on the downside. So the investor would have to be comfortable with risk while being happy with a capped return," she added.

A 9.167%-per-year cap would be acceptable for an investor modestly bullish on the ETF, she said. But it would not be a good option for those who anticipate the fund to deliver very strong gains.

Capping a rally

"Very bullish investors would not be interested in this product because they would want uncapped returns. If the fund grows by more than 13.75%, a direct investor in the fund would outperform the notes," she said.

The Barclays Super Track notes linked to the PowerShares QQQ ETF are only the second announced deal linked to this underlying so far this year despite a rally seen in the high-tech equity space, according to data compiled by Prospect News. None of the deals has priced yet.

The PowerShares QQQ trust is up 8.25% this year versus 7.47% for the SPDR S&P 500 ETF, an ETF that tracks the performance of the S&P 500 index.

Shares of the PowerShares QQQ trust rallied last year as well, with a 47.6% gain in 2009.

Last month, JPMorgan Chase & Co. announced 0% buffered equity notes due April 9, 2012 based on this ETF, which it had scheduled to price on April 6. But as of Friday, the notes have yet not priced, according to data compiled by Prospect News.

Hampson said that the performance of the underlying was one factor that may appeal to investors but that structural aspects of the investment should not be overlooked.

"I guess, as with all these products, the investor has to look at the underlying as well as the structure and make a personal choice and have a personal view," she said.

"If an investor thought that the fund was going to continue with the same growth, then this would be the wrong product for them as they would, as you point out, be hindered by the cap. If however the investor thought that the growth was going to slow down, then the double leverage would help returns."

Chances to gain

Future Value Consultants calculates the probability of losses and return outcomes with its probability tables using a Monte Carlo simulation.

The performance is modeled based on a series of parameters, which include volatility, dividends and interest rates, among others.

The probability for investors to generate an annual return of 10% or more is none, according to the tables.

This result is simply due to the fact that the annual cap for this product is 9.167%. Probabilities of gains and losses are shown on a per annum basis, Hampson said.

The largest return bucket is an annual gain comprised between 5% and 10%, which investors have a 59% chance of yielding.

"This is where most of the returns are," said Hampson. "And that's mostly due to the leverage."

Losses and risk

Looking at the downside, Hampson said that the absence of a buffer caused a relatively high probability of losses. Her firm estimates that investors have a 27.4% chance of losing more than 5% of the capital at maturity.

In order to quantify risk, Future Value Consultants generates riskmap, a rating that measures the risk associated with a product on a scale from zero to 10. Riskmap for these notes is 5.42.

The rating versus riskmap chart published in the firm's report shows that the 5.42 score is relatively lower than most products recently rated by Future Value Consultants.

"I think it just shows that rather than this product not being risky - which it obviously is - there are higher risk products out there, which you'd hope would offer a higher return," said Hampson.

"The higher risk products would most likely be more risky as a result of choosing a more volatile underlying than creating a more risky structure because those notes are already at the top end of risky structures due to their lack of downside protection," said Hampson.

Leverage, no barrier

Hampson said that structures built around leverage without any form of buffer or barrier to protect the principal were seen rather frequently.

"It seems to be quite common. I guess when linking to an ETF like this one, the issuer has to structure the product to attract people away from investing directly in the fund. In order to get the double leverage and the maximum return at 9.2% per annum, the issuer has chosen to have no downside protection, which shouldn't put off investors used to investing directly into funds," Hampson said.

The lack of downside protection has an impact on the return rating, said Hampson. That's because this score, put together by Future Value Consultants, is an indicator, on a scale of zero to 10, of the risk-adjusted return of the notes.

The notes have a 4.78 return rating.

While the rating is apparently low, Hampson said, "It compares reasonably well with the rest of the market."

Average overall

Future Value Consultants gives each notes it rates an overall rating that summarizes the quality of the product on a scale of zero to 10.

The overall rating is the firm's opinion on the quality of a deal, taking into account costs, structure and risk-return profile. It's an average of three scores weighted 40% to the value score, 40% to the return score and 20% to the simplicity score.

This product has an overall rating of 7.01.

"This is just a combination of the value, return and simplicity all falling within the higher range of the scores, all contributing to a decent overall score," said Hampson.

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