JPMorgan’s digital notes on global equity basket offer short tenor, tiny barrier, advisers say

By Emma Trincal

New York, May 2 – JPMorgan Chase Financial Co. LLC’s $3 million of 0% trigger jump securities due May 24, 2024 linked an equally weighted basket of equity indexes offer a competitive payout over a short tenor, but the consequence is a reduced barrier size, advisers said.

The basket consists of the Nasdaq-100 index, the S&P 500 index and the Euro Stoxx 50 index, according to a 424B2 with the Securities and Exchange Commission.

If the basket finishes at or above its initial level, the payout at maturity will equal par plus the fixed payment percentage of 14.8%.

If the basket falls by up to 10%, the payout will be par.

Otherwise, investors will lose 1% for each 1% decline from the initial level.

Global play

Tom Balcom, founder of 1650 Wealth Management, said he has not seen that type of underlying basket recently.

“It’s interesting. I’ve seen baskets of international indices but not so much a mix of U.S. and international. This one is a global equity basket. You would obviously allocate it to the global equity portion of the portfolio,” he said.

The tenor of the note was particularly short, he added.

“13-month is not a long time. You have to have a specific view.”

Investors could not be overly bullish given the limited upside although the cap was particularly attractive, he said.

“Getting almost 15% on a 13-month is nice but probably not juicy enough if you’re really bullish.

Investors could not be too bearish either.

“Any bearish or even slightly bearish investor would request more protection.”

Small barrier

The amount of downside protection was a sticking point for this adviser.

“I know that the issuer is limited in how much downside protection they can offer since it’s such a short maturity. But a 10% barrier is not much,” he said.

“I always want as much protection as possible. I would want to see a bigger barrier here.”

In order to obtain it, Balcom said he would probably have to make a choice between an extended maturity or a lower return.

“I would go for the longer maturity,” he said.

At-the-money digital

The structure also differed from recently-issued digital notes in that the level at which the digital is triggered is at the initial price (at-the-money digital) not at a barrier level (in-the-money). This setup provides a higher premium but one that is less likely to be paid since the underlying price needs to close higher.

“I think I prefer it when you get paid at the barrier level. You get a lower return but you increase the odds of getting paid,” he said.

“That’s usually my preference.

But without any modifications in the structure, Balcom said he would not consider the notes.

“The barrier is too small for me,” he said.

Goldilocks trade

Donald McCoy, financial adviser at Planners Financial Services, agreed that the notes required a specific market outlook and a fair level of risk tolerance given the slim barrier.

“This is really the Goldilocks trade. You don’t want to be too bearish, but you don’t want to be too bullish either.

“If you’re bullish, you’re better off investing in the indices directly without a cap. If you’re really bearish, you’ll probably want a buffer rather than a barrier.”

Investors had to be comfortable with the downside risk.

Caveat emptor

“These three indices can easily average an 11% drop over a 13-month period given the volatility we’re looking at, the issues we’re facing with a potential recession, the debt ceiling without even mentioning global tensions with the continued war in Ukraine.”

For conservative investors, the note offered insufficient downside protection, he said.

“This would be for moderately aggressive investors who are not totally sold on the upside but who recognize that if things go south, they will be feeling the full brunt of it.”

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent with Morgan Stanley Wealth Management as dealer.

The notes settled on April 26.

The Cusip number is 48133VE22.

The fee is 2.25%.

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