JPMorgan’s uncapped buffered notes on EAFE, EM ETFs show compelling terms for short-term bet

By Emma Trincal

New York, May 5 – JPMorgan Chase Financial Co. LLC’s $325,000 of 0% uncapped dual directional buffered return enhanced notes due May 1, 2024 linked to the lesser performing of the iShares MSCI Emerging Markets ETF and the iShares MSCI EAFE ETF combine several attractive features for investors seeking international exposure with unlimited upside and downside protection, advisers said.

If each ETF finishes at or above the initial level, the payout at maturity will be par plus 1.14 times the return of the lesser performing ETF, according to a 424B2 filing with the Securities and Exchange Commission.

If either ETF falls by no more than the 15% buffer, the payout will be par plus the absolute value of the return of the worst performer.

If either ETF falls by more than 15%, investors will lose 1% for each 1% decline of the worst performer beyond the 15% buffer.

Enough time

Lance Roberts, chief investment strategist at Clarity Financial, said there is always a chance within the life of the notes to see one of the two underliers drop more than 15%.

“It’s likely that they may burst the barrier in the next few months. But the question is: do you get back before the next two years is up? I think there’s a reasonable possibility that you will.

“We’ve already been in a consolidation,” he said. “If the market really plummets, the Fed will come in, cut rates, go back to QE and the market will rally back.”

Entry points

The initial price for the emerging markets ETF on the April 26 strike date was $41.15, setting the buffer level at approximately $35.

For the iShares MSCI EAAFE fund, the buffer level was at about $58 based on a closing price of $68.17.

On Thursday afternoon amid a heavy sell-off, the two ETFs closed at $41.50 and $67.93, respectively, still near their initial levels of the previous week.

Both ETFs were significantly below their 52-week highs when the deal was struck.

The iShares Emerging Markets fund was 27% off its peak of June. The EAFE fund priced 17% below its September high.

“To go from these levels down another 15% would be a pretty big drawdown,” he said.

Buffer, cap

“The risk of course is that it goes down and doesn’t come back. But it hasn’t happened very often historically.”

A very severe bear market could put some pressure on the barrier, but the drawdown would have to be extreme, he said.

“It’s not risk free. And you have one of the two ETFs, the emerging markets one, that’s more volatile than the other. But I think the protection you’re getting is reasonable based on current levels,” he said.

The absence of a cap on the upside was unusual for a short-term note.

“It’s nice to have no cap. But I don’t think it matters because we’re not going to be in a raging bull market any time soon. It’s going to be either flat or negative,” he said.

Outperformance

Steve Doucette, financial adviser at Proctor Financial, said he liked the terms of the notes especially over the short holding period.

“No way you’re not going to outperform with this note. Both have come down quite a bit. I might change the buffer to 10% and get more leverage,” he said.

The structure was exceptionally compelling, he noted.

“Where do you get more than 100% return, no cap, and a 15% buffer on a two-year term plus the absolute return component?” he said.

“It’s a pretty exciting note.”

Up or down

The adviser said he has been trying to replace an emerging market note due to mature soon.

“This is the kind of basic structure easy to explain to a client. We might be looking into it,” he said.

The buffer did not eliminate the risk, but it significantly reduced it, he added.

“Of course, we can have a pullback, and the index may never come back up. But the entry point is pretty good for a two-year.

“Who knows where the market is going to be? If it’s off to the races, if the global economy starts cranking, you capture the whole thing. No cap. The market could be shooting through the roof, and you get the full upside.

“If it’s down, you still get the buffer, it’s some kind of protection,” he said.

Nice story

Doucette was more skeptical about the absolute return feature.

“Anytime I’ve had an absolute return, I’ve never seen it pay off. Obviously if your index falls within that range, you’re going to outperform a lot. But the odds are slim. It’s like buying blackjack insurance,” he said.

“At the same time, it’s a great story and you’re not giving up much for this feature. So why not keep it?”

Doucette said that allocating to international stocks made sense right now.

“It’s part of your asset allocation and it’s a good way to diversify away from this massive sell-off in the U.S.,” he said.

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes settled on Wednesday.

The Cusip number is 48133FVV4.

The fee is 0.4%.

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