CIBC’s $4.31 million market-linked notes on iShares MSCI EAFE offer sound alternative to ETF

By Emma Trincal

New York, March 5 – Canadian Imperial Bank of Commerce priced $4.31 million of 0% market-linked securities with leveraged upside participation and contingent downside due March 6, 2023 linked to the iShares MSCI EAFE exchange-traded fund, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus 128% of any ETF gain.

Investors will receive par if the ETF falls by up to 30% and will lose 1% for every 1% decline below the initial level if it falls by more than 30%.

Not optional

“It’s an interesting note,” said Carl Kunhardt, wealth adviser at Quest Capital Management.

Advisers seeking to get a “balanced portfolio” should consider investing 20% to 30% in international equity, he said.

“Therefore, you have to go developed markets. No one in their right mind would put 30% in emerging markets. Once you exclude the U.S. and Canada, you’re pretty much talking about Europe. And that’s pretty much the EAFE.”

The MSCI EAFE index is not purely European. But 61% of the fund’s market value is allocated to countries in Continental Europe, with the U.K. accounting for 16.84% of the portfolio. The top country is Japan with nearly a quarter of the market value of the fund, according to the iShares website. Other non-European countries include Australia with a 6.82% weighting and Hong Kong with a 3.66% weighting,

“I like the [iShares MSCI All Country World index] better,” said Kunhardt.

“It’s more broadly diversified. But if you want exposure to developed countries ex-U.S., the EAFE is probably the way to go,” he said.

The MSCI ACWI index allocates more than 50% to U.S. equity.

Structure

“Since the EAFE is essential to have in any portfolio, the question then is: am I better off with an ETF or with this leveraged note?

“Well, let’s see. I have 1.28 leverage on the upside, no cap, an annual fee of 72 basis points, which is reasonable...we’re almost in mutual fund territory.”

The fee is 3.61% over the five-year term, according to the prospectus.

Timing

The main risk, he said, would be if the index declined toward the end of the term.

“If we have a market downturn in the first year, even a bear market, there’s more than enough time for a recovery and you’re likely to finish above the barrier. You may have an opportunity cost but you haven’t lost your principal,” he said.

“It would be another story if you had a pullback in the last year. That’s always a risk.”

Kunhardt said he tends to split his international bucket between long-only investments and structured notes as a hedge. In this case he may allocate 80% to direct equity and 20% to the note.

“It’s an interesting product,” he said.

Credit, index

Michael Kalscheur, financial adviser at Castle Wealth Advisors, began his analysis looking at his first two criteria: the issuer’s credit and the underlying.

“We like the fact that the CIBC is rated A+ by S&P. It gives us a lot of confidence,” he said.

“We also like recognizable indices and this is definitely something that clients know or at least they’re familiar with the top holdings. Who doesn’t know Nestlé, HSBC or Toyota?”

The index can be easily tracked, he said.

You can easily track it. This is the index we use as our bogey for developed world equity,” he said.

The upside was also attractive due to the leverage multiple and absence of any cap.

“Having no cap is a priority for us. I’m usually not willing to cap my return. I don’t like caps. This product has no cap, which guarantees that we have the potential for a good return,” he said.

No cap

“The 1.28 leverage is very good. It gives you more than enough juice to make up for the dividends.”

Kalscheur added that he is “not a fan” of 2x or 3x leveraged notes because they often come with a cap.

“This is a very good leverage for us. Having that and no cap makes the notes very attractive for a bull,” he said.

Barrier

Additionally, he assessed the value of the 30% contingent protection looking at historical data.

Since 2001 and on any five-year rolling period, the MSCI EAFE index has only breached the 30% threshold 0.5% of the time, he noted.

“Am I comfortable with a 99.5% chance of not losing money? Of course I am. If it was a 20% barrier I wouldn’t be. It would be too much risk to take. But 30% over five years is fine,” he said.

Cost

Finally, the fee was acceptable.

“It’s higher than I would want it to be, but it’s not a death knell.”

Overall, Kalscheur said the note “hit” his five criteria: issuer’s strength; recognizable index; return enhancement with no cap; adequate downside protection; and fees.

“We like it a lot.”

Wells Fargo Securities, LLC is the agent.

The notes (Cusip: 13605WJR3) settled on Monday.

The fee is 3.61%.

© 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.