Barclays' Super Track notes linked to indexes, ETFs combine protection with diversification

By Emma Trincal

New York, May 29 - Barclays Bank plc's 0% buffered Super Track notes due June 26, 2018 linked to a basket of indexes and exchange-traded funds caught market participants' attention for their highly diversified underlying basket and competitive buffer.

The basket consists of 12 ETFs and indexes: the S&P 500 index with a 34.5% weight; the iShares MSCI EAFE index fund with a 9% weight; the Russell 2000 index and the PowerShares DB Commodity Index Tracking Fund with an 8% weight each; the iShares iBoxx $ Investment Grade Corporate Bond fund and the iShares MSCI Japan index fund with a 7% weight each; the Consumer Staples Select Sector SPDR fund, the iShares Dow Jones Select Dividend index fund and the iShares MSCI Emerging Markets index fund with a 5% weight each; the Health Care Select Sector SPDR fund and the PowerShares QQQ Trust, Series 1, each with a 4% weight; and the iShares Barclays Treasury Inflation Protected Securities Bond fund with a 3.5% weight, according to a 424B2 filing with the Securities and Exchange Commission.

The tracker-type of payout offers at maturity par plus any basket gain. Investors will receive par if the basket falls by up to 17.5% to 24.5% and will lose 1% for every 1% decline beyond the buffer, with the exact percentage to be set at pricing.

Smaller investors

Andrew Valentine Pool, main trader at Regatta Research & Money Management, said that the notes would be attractive to smaller investors.

"I do like the diversification and the no cap. I also like the five-year term. The 20% buffer is respectable," he said.

"To try and diversify the portfolio on your own across the same mix of assets would be too time-consuming and very difficult for a small account. Therefore, this deal is a good fit for a smaller client portfolio, for someone who would want plenty of equity exposure with a good buffer."

Pool said that the longer tenor is part of a trend that allows issuers to offer better downside terms.

"It's a five-year deal, therefore it's less liquid. But you have to give up something if you want to get something," he said.

"We've seen plenty of five-year products lately giving you good buffers, but they are tied to 10 stocks or three indexes, whereas this one gives you plenty of indexes and funds with a 20% buffer. The diversification aspect of the structure is what makes this product compelling, especially for a smaller portfolio.

"Those investors can usually find a decent buffer if they give up some liquidity. Five years for us would be the max though. But we don't see that many products giving you such level of diversification, by that I mean such a broad mix of funds and indexes with that type of protection. If somebody wants plenty of equity exposure and a decent buffer, this would seem like a good fit."

A market participant agreed. He said that the diversified underlying basket was one of the strengths of the product.

"It's an interesting deal. You have a one-to-one upside, a great buffer," he said.

"It looks like a pretty good product, especially for people who want multi-asset exposure. You're getting enough funds and indexes in one swoop instead of having to buy 12 ETFs."

Buffer pricing

The market participant pointed to the buffer of 21% at the mid-point in the range and to its appeal for investors considering the diversified exposure.

"The five-year length enables the issuer to price a pretty good buffer. But when you put several assets into the underlying basket, it dampens volatility. One thing that helps here is the high equity weighting, which tends to be more volatile. Also, you're using dividends to structure something like this. That's important," this market participant said.

Equity makes for 81.5% of the basket, according to the prospectus. The U.S. equity allocation alone represents nearly 70% of the total, with less than 12% going to international equity - emerging markets and Japan.

Meanwhile, fixed income and commodities account for only 10.5% and 8% of the total, respectively.

"My guess is it's really the dividend that allows you to put it together," the market participant said.

"They're using a lot of iShares, which is good from Barclays' perspective.

"I don't know what the average dividend yield would be for this basket. You would have to look at the yield for each component and apply the right weight. My guess is that it should be anywhere between 1.5% and 2%."

The longer duration was also helpful for the structuring of the buffer, he noted.

"Say the basket has an average yield of 2%. On five years, that's 10% that you get to play with," he said.

HSBC trend

The market participant said that the notes offered a structure that was very similar to a recently announced deal by HSBC USA Inc.

"It was a four-year HSBC tied to the Dow. It was just one index, but like this one, it was uncapped, unleveraged and it had a solid buffer," he said.

He was referring to HSBC's 0% buffered uncapped market participation securities due March 24, 2017 linked to the Dow Jones industrial average index.

The notes (Cusip: 40432XEM9) were scheduled to price on Tuesday, according to an FWP filing with the SEC.

The payout for this product was par plus any index gain. On the downside, the notes offered a buffer in a 17% to 22% range.

"We're seeing more and more of those. HSBC has been doing this for a couple of months," he said.

"The innovative factor from Barclays is the multi-asset exposure."

Barclays is the agent.

The notes will price on June 21 and settle on June 26.

The Cusip number is 06741TVS3.

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