RBC's buffered bullish enhanced notes tied to indexes, ETFs offer global equity, commodity bet

By Emma Trincal

New York, April 27 - Royal Bank of Canada's upcoming 0% buffered bullish enhanced return notes due May 22, 2014 linked to a basket of indexes and exchange-traded funds offer a double play on global equity and commodities, sources said.

The basket includes equal weights of the Euro Stoxx 50 index, the Nikkei 225 index, the iShares MSCI Brazil index fund and the iShares MSCI Canada index fund, according to an FWP filing with the Securities and Exchange Commission.

The payout at maturity will be par plus 150% of any increase in the basket, subject to a maximum return of 35% to 40% that will be set at pricing. Investors will receive par if the basket declines by 10% or less and will lose 1% for every 1% that it declines beyond 10%.

Straightforward

"It's a pretty straightforward structure giving investors access to non-U.S. large caps and some mix of emerging markets, commodity play," a market participant said.

He said that Canada and Brazil give investors a way to gain commodity exposure because both countries are big commodity suppliers.

The fact that the underlying basket included one emerging market versus three developed markets did not surprise him.

"I have seen that mix before. It's not unusual," he said.

Basket composition

More interesting was the mix between two ETFs and two indexes.

"Sometimes it's easier to use an ETF because the ETF may be more liquid to trade than the index. If you don't have liquid index futures, the trader will prefer the funds," he said.

"Not having everything in ETFs can also be slightly cheaper because the index saves you the double layer of fees. When you use an ETF, the issuer of the notes has to make money, but the ETF sponsor also charges a fee," he noted.

The equal weights of the basket components make the product easy to explain, the market participant added.

"The allocation is easy. It's 25% for each country. You don't have to decide how much you want to invest in Canada versus Brazil," he said.

Delaying tightening

A trader said that he liked the notes based on the economic prospects of the underlying countries as well as the monetary policies of their respective central banks.

"It's a bet on global recovery. Japan will come back. Brazil, Canada are good commodities plays," he said.

He said that with the 10% buffer, he was comfortable betting on the appreciation of the underlying basket over the next three years.

One of his views was that the continued easing policies in some of those countries, or the reluctance to tighten, should benefit the equity markets of those regions during the three-year term.

"We know that the Fed is not going to raise rates for at least another year and a half. And Japan has very low interest rates," he said.

"Europe is more of a wild card," he said, but "it's only one out of four."

"With a 40% cap and 1.5 times leverage, you're not going to lose, I think," he said.

The notes (Cusip: 78008TAB0) will price May 18 and settle May 20.

RBC Capital Markets, LLC is the underwriter.

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