Barclays' notes due 2016 linked to iShares MSCI EAFE offer European play, 90% protection

By Emma Trincal

New York, Feb. 7 - For investors who want exposure to developed countries but are worried about Europe falling into a recession, Barclays Bank plc's 0% notes due Feb. 29, 2016 linked to the iShares MSCI EAFE index fund may offer a conservative and attractive way to play the European stock market, said Frederick Wright, partner and chief investment officer at Smith & Howard Wealth Management.

The iShares MSCI EAFE index fund tracks the performance of the MSCI EAFE index, an international stock benchmark that represents stocks from Europe, Australasia and the Far East. The index does not include the United States and Canada. A benchmark for developed countries, it also excludes emerging markets. European stocks have a weighting in the index of at least two-thirds.

The notes offer 90% principal protection.

If the exchange-traded fund's final share price is greater than 90% of the initial share price, the payout at maturity will be par plus the percentage change in the ETF's share price, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive 90% of par if the fund return is less than or equal to negative 10%.

"It's called a note with partial downside protection. Here you've got 90% of your principal protected. I like it. I would like it more if it wasn't a four-year, but it seems like a very good product," Wright said.

The upside is capped at 50% to 55%, according to the prospectus, which is about 12.5% to 13.75% a year.

"An annual return of almost 13% seems very good. It gives you a chance to really participate in the upside," he said.

Because of concerns over the European debt crisis, the value of many European stocks has declined over the past few months, he said.

Comfort zone

"I like the underlying," he said, adding that "Europe is pretty cheap."

Year to date, the ETF's share price has gained nearly 9%.

Wright said the 90% downside protection helps buy-and-hold investors stay in the game.

"Clients will take comfort knowing they can't lose more than 10% no matter what happens," he said.

"When you have that type of protection, it's a little bit easier to hang on. Investing is all about hanging in there for the long haul in order to get your returns."

Wright said that partial principal protection is better than having a buffer.

"If you have a 10% buffer, you're not going to lose on the first 10%, but after that, you can lose up to 90%," he said.

"Here, it's pretty much the opposite. Yes, you take your losses immediately, but once you're down to 10%, you can't lose any more than that.

"I prefer this one much better because the potential downside loss is a lot less."

100 beats 90

For others, nothing replaces full principal protection.

"There is a buyer for everything. It's like real estate. It depends on your likes and dislikes. For me, this wouldn't cut it," a broker said.

"They're limiting your upside to 50% and you still have a 10% at risk on the downside.

"I'd much prefer having 100% downside protection and whatever upside they give me. They may give me a lower cap. Fine.

"After disclosing credit risk, I like to be able to tell my client 'You can't lose anything, but you can win.'

"Here, you tell your clients that they can win something but that they can also lose 10%. Try telling someone who's got $1 million to invest 'You can lose $100,000.'

"You know the quote. 'Don't tell me about the return on my money. Tell me about the return of my money.'

"This is not my type of product. I like losing less. In fact, I like not losing at all. It's even better."

The notes (Cusip: 06738KN72) will price Feb. 24 and settle Feb. 29.

Barclays Capital Inc. is the agent.

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