Barclays’ buffered SuperTrack notes linked to Euro Stoxx designed for defensive, bullish play

By Emma Trincal

New York, March 26 – Barclays Bank plc’s 0% buffered SuperTrack notes due April 29, 2022 linked to the Euro Stoxx 50 index should appeal to risk-averse investors given its large buffer. But the notes will only outperform the index if the price moves more than its historical average, which requires investors to have a strongly bullish outlook on the underlying market.

If the index return is greater than zero, the payout at maturity will be par plus 1.75 to 1.8 times the index return, according to a 424B2 filing with the Securities and Exchange Commission.

If the index return is flat or negative but the index declines by no more than the 30% buffer, the payout will be par.

Investors will lose 1% for each 1% loss beyond the buffer.

Buffer vs. dividends

“Pretty healthy downside buffer. This is obviously for the more risk-averse investor who wants exposure to the Euro Stoxx but in a very conservative way. It’s for investors who are scared to buy the index directly,” said Tom Balcom, founder of 1650 Wealth Management.

“There is a trade-off though,” he added, pointing to the high dividends investors must forgo when investing in the notes. The Euro Stoxx 50 yields 3.12%.

“Over three years, you’re giving up a little bit more than 9% in return,” he said.

He calculated that a price return of about 10% over the three years would be the breakeven point over which the notes would outperform the index, based on an hypothetical 1.8 times leverage factor.

Lackluster performance

“A 10% price return plus 9% in dividends is 19%. That’s what you get from an index fund. The notes will pay you 10% times 1.8, or 18%. Give or take, you need the index to be up more than 3% or 4% a year to beat the long-only position,” he said.

It seemed like not much. But for Balcom, it may be a challenge considering the lackluster performance of the Euro Stoxx 50 index.

“The Euro Stoxx has returned less than 6% a year over the last 10 years. It’s been terrible. Over the past five years it’s been flat. It has gone nowhere, and that’s the risk you take with this note.”

The index lost 16% last year after a very good year in 2017, when it gained 24%. It was flat in 2016 after two down years in 2015 and 2014.

“The 1.8 times leverage helps recoup some of the loss in dividends, but you’re giving up a juicy yield of more than 3%. Even though it doesn’t take much to beat the index, it’s not a guarantee because the Euro Stoxx has done very poorly,” he said.

“On the one hand, the opportunity to have exposure to the index with less downside risk is great.

“But if the index is flat or slightly down, you’re going to miss the dividends. You’re not going to do well.

“Of course I don’t know anyone who would balk at this note with a 30% downside protection.

“But keep in mind that if the index is not moving, you will underperform the fund by a whole lot.”

Volatility bet

Jonathan Tiemann, president of Tiemann Investment Advisors, agreed about the risks involved with a flat, slow-moving market.

“If it moves sideways, you’d be better off with the underlying that pays the dividends,” he said.

“But if the Euro Stoxx is volatile either way, your notes will do better either way.

“This really is kind of a bet that volatility is cheaper than it will be.

“The outperformance is in the tails. You want volatility to occur.”

Tiemann said the notes were attractive.

“You’re giving up the dividends, and it allows you to buy call options and put options,” he said.

“You expect the index to move sufficiently so you can do better with the notes.”

European uncertainty

Tiemann, however, is not necessarily bullish on the Euro Stoxx 50 index at the moment.

“It will go up as a general matter. Whether it will go up in the next three years, I don’t know,” he said.

The euro zone offers many risks such as slowing growth and political uncertainty as illustrated by the difficult departure of the United Kingdom from the European Union, which has created the Brexit crisis in that country.

“It’s a pretty risky asset class actually,” said Tiemann about the European equity market.

“In that way the note may not be a bad play because of the leverage and downside protection.

“If the risk is going to increase, the implied options you’re now buying relatively cheaply will become more valuable.”

Asked whether he liked the notes, Tiemann said, “I actually kind of do. I’m not a buyer of structured notes in general, but this one isn’t bad. It makes sense for the market circumstances.”

Barclays is the agent.

The notes (Cusip: 06747MKM7) will price on Friday.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.