Barclays' notes linked to Industrial Select SPDR offer defensive, bullish play on recovery

By Emma Trincal

New York, March 8 - Barclays Bank plc's 0% notes due Sept. 16, 2013 linked to the Industrial Select Sector SPDR fund give investors an opportunity to participate in the growth of the industrial sector of the S&P 500 index while mitigating the downside risk with an 80% barrier, according to a 424B2 filing with the Securities and Exchange Commission.

For sources, the uncapped upside would be appealing to investors who anticipate faster U.S. economic growth but still want to play it safe should their view turn out to be wrong.

If the fund finishes at or above the 80% barrier level, the payout at maturity will be par plus any gain, and investors will receive a payout of at least par.

Otherwise, the payout at maturity will be par plus the fund return, with full exposure to losses.

Infrastructure play

"It's a pretty straightforward note," said Steve Doucette, financial adviser at Proctor Financial. "Reduced downside risk with the barrier, no cap on the upside.

"It's a bet on the economic growth scenario."

The exchange-traded fund used as the underlying seeks to replicate the returns of the Industrial Select Sector index, a modified market capitalization-based index that tracks the stocks of companies providing industrial products and services such as electrical equipment, waste management services and industrial machinery products.

"This is an infrastructure play, as you can tell from this fund's holdings," said Matt Medeiros, president and chief executive of the Institute for Wealth Management.

"And it makes sense when you look at what we're spending as percentage of the GDP on infrastructure. It continues to rise."

Medeiros pointed to some of the top 10 holdings in the index such as Caterpillar Inc., Boeing Co. and Union Pacific Corp.

As of December, the index was comprised of 61 stocks.

The underlying fund is up 9.65% year to date. It is outperforming the S&P 500, which has gained 8.75%.

"I like the index. It's trading close to the highs, but that's where the downside protection adds value," Medeiros said.

"It's a 20% barrier, making the trade a little bit safer than a direct investment in the fund.

"I'm not bullish, but I'm cautiously optimistic on the U.S. economy in general.

"A handful of the companies in this index are multinational that are involved in infrastructure. They participate in the infrastructure expansion in the emerging markets, countries like China, Brazil, India. I like that."

The use of the Industrial Select Sector SPDR fund for structuring notes is limited in number of deals and deal sizes, according to data compiled by Prospect News.

So far this year, only three deals based on this fund (all issued by Barclays) have been sold. The largest one was priced at $1.75 million.

Last year, only two deals were brought to market. The biggest one, in the amount of $25 million, was issued by Bank of America Corp. and feature a leveraged structure.

Stock picking as defense

"Of all the possible underlyings, I don't know why they end up picking this one," said Doucette.

"The structure itself is very plain vanilla.

"But if we were looking to make a bullish bet on the industrial sector, we wouldn't be buying the index. We'd be looking for an active manager to pick the right stocks."

Doucette said that for 18 months, the 80% barrier was the interesting feature in the deal.

"You can find value in a 20% protection in this low-volatility environment," he said, noting however that the barrier provides less protection than a buffer.

"I just think it's hard to get excited about this note," he said.

Doucette said that he would rather select an actively managed fund if he wanted to get exposure to the industrial sector, arguing that the sharp U.S. stock rally is making him more cautious.

"As the market momentum tilts toward a growing economy, the market could easily go the other way. I'm always wary when things exceed the means. The market has been up 25% in just a few months. If things get rocky, active managers tend to outperform," he said.

Since its low on Oct. 3, the S&P 500 has gained 24.5%.

The fund, which bottomed on the following day, is up 26.5% over the same period.

Barclays Capital Inc. is the agent with JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC as dealers.

The notes will price Friday and settle Wednesday.

The Cusip number is 06738KW56.

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