Barclays’ SuperTrack notes tied to Russell 1000 Value tap into rarely used underlying

By Emma Trincal

New York, Nov. 22 – Barclays Bank plc’s 0% SuperTrack notes due Nov. 29, 2019 linked to the iShares Russell 1000 Value exchange-traded fund will offer investors exposure to a large-cap value index that only a few structured notes have employed in the past, according to data compiled by Prospect News.

If the ETF return is positive, the payout at maturity will be par plus 1.35 times the ETF gain, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will be fully exposed to any ETF decline.

Break-even

“This deal has no cap on a two-year – not bad... and one-to-one on the downside. If I was bullish on this index, which is a proxy for large-cap value, it would be a good way to outperform,” said Jason Barsema, co-founder of Halo Investing.

Investors give up a dividend yield of 2.27% but only for two years, he noted.

The leverage factor of 1.35 allows investors to offset the opportunity cost when the annual return is above 8%.

“Above that, you can breakeven from owning the notes versus owning the ETF,” he said.

Value proxy

The Russell 1000 Value index, a sub-index of the Russell 1000, is a value-oriented benchmark targeting value stocks with lower price-to-book ratios and lower forecasted growth values.

Currently the top sectors in the index are financials (26.58%), health care (13.80%) and energy (10.58%), according to the prospectus. Berkshire Hathaway Inc. is the top holding followed by JPMorgan Chase & Co. and Exxon Mobil Corp.

Hardly ever used

The use of the Russell 1000 Value index as an underlier for structured notes is very rare.

In the past 10 years only two registered notes linked to this index as a sole underlier have priced in the United States, according to data compiled by Prospect News.

Deutsche Bank AG, London Branch priced one small offering of leveraged buffered notes for $1.13 million in January 2008. Barclays priced another one in January 2016: $8.19 million of Accelerated Return Notes distributed by BofA Merrill Lynch.

The iShares Russell 1000 Value ETF has not been seen in a note during that period, the data showed.

Old brand

The use of the main index itself has been on the decline, said Barsema, talking about the Russell 1000 index.

“The Russell 1000 is kind of going away. People are not using it anymore I’m not sure why. Sometimes with indices it’s cyclical. It has a lot to do with branding,” he said.

A U.S. portfolio manager will use the S&P 500 index for its large-cap core holdings and the Russell 2000 index for small-caps, he said.

“For value you would use the Russell 1000 Value and as a growth manager, the Russell 1000 Growth.

“These are the well-established benchmarks,” he noted.

Value and risk

“I’ve seen structured notes on the Growth...not so much on the Value.

“I think it’s because people buy large-cap value stocks mostly for the dividends. They don’t want to give it away,” he said.

It is not so much the yield that those value-oriented investors refuse to sacrifice. In some cases the dividend is part of an overall plan to reduce risk.

The Euro Stoxx 50 index also has a high dividend yield, he noted.

“It doesn’t stop people from buying notes on it all the time...At the contrary. The terms are really good,” he said.

But for value investors, high-dividend stocks can also be a means to reduce their exposure to interest rate risk, he noted.

“As interest rates go up, large-cap value stocks will fare better than other investments like MLPs for instance.”

He was referring to Master Limited Partnership, which are publicly listed entities in the energy or real estate sectors that distribute high-yielding income streams.

Core allocation

Tom Balcom, founder of 1650 Wealth Management, said that value investing may make sense at this point as part of an overall plan.

“Right now, it’s all about growth. Value is out of favor. But you want to have both...You need growth and value in your portfolio,” he said.

“If you recall the late 1990s’, value was unloved and it underperformed. And then the tech bubble bust.

“We could see a repeat of that. Value stands to be part of any portfolio.”

Protection wanted

In order to consider the notes, however, he said he would want to see some downside protection.

“I am not sure why you wouldn’t buy the ETF here. I understand that you have the upside leverage, but you’re not getting the dividends and it’s not clear if you’re going to be better off with the leverage and not the dividends than the other way around. It depends on the performance. I’d want at least some protection before considering that type of tradeoff,” he said.

Barclays is the agent.

The notes will price on Monday.

The Cusip number is 06744CLC3.

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