Advisers discuss buffer versus long duration with JPMorgan’s $59,000 notes on Euro Stoxx 50

By Emma Trincal

New York, June 24 – JPMorgan Chase Financial Co. LLC’s $59,000 of 0% uncapped buffered return enhanced notes due June 23, 2026 linked to the Euro Stoxx 50 index illustrate how advisers view the value of time as an additional source of safety. For some, a long maturity and a large buffer tilt the balance towards the downside protection at the detriment of gains on the upside. Others are satisfied with a generous buffer especially when it does not limit the upside.

The notes pay par plus 152% of the index gain, according to a 424B2 filing with the Securities and Exchange Commission.

The payout will be par if the index declines but by no more than the 20% buffer. Investors will lose 1% for every 1% that the index declines beyond the buffer.

Tiny trade

One of the first characteristics of the offering was its modest size.

“59,000 with a 2.75% fee, that’s $1,600. It’s probably a trade for a small RIA,” said Steve Doucette, financial adviser at Proctor Financial. “RIA” stands for registered investment advisor.

The 2.75% fee is paid upfront and represents a cost of approximately 69 basis points per annum, according to the prospectus.

“You get more negotiating power with a bigger size deal that’s for sure,” he said.

Timing the recovery

The payout structure was attractive on the upside, according to this adviser.

“It’s four years out but there is no cap. Having no cap and some leverage is always neat,” he said.

However, the note may be too defensive for such a timeframe, he added.

“The 20% buffer may not come into play at all after four years. The U.S. market is down more than 20% already. Europe is doing even worse.”

The Euro Stoxx index is down more than 24% for the year.

“I can’t imagine that four years out, the world would still be suffering from inflation, recession and stagflation.”

European markets have been volatile as a result of higher U.S. interest rates, a persistent inflation on a global scale, the start of a tightening phase in the region and a shortage of natural gas, which has accelerated inflation.

“We don’t know what the market will be like in six months or a year. Are we going to be 50% down rather than 20%? It’s possible that this crisis could drag on for two years. But after that, we should be off to the races,” he said.

February to March 2020

Doucette looked at the record short-lived bear market at the beginning of the Covid-19 pandemic (Feb. 19 to March 23, 2020) during which the S&P 500 index lost 33.9%. A robust bull market ensued moving the benchmark 114% higher in 21.4 months.

“Two years ago, we saw how fast we can go through a bear market. In just a month! There’s no guarantee that we will recover that quickly this time, but four years is a long-term investment horizon, especially when the market has been going down for almost six months already.”

Unlike the Dow Jones industrial average and the S&P 500 index, which both peaked during the first week of January, the Euro Stoxx 50 hit a high two months earlier. Since the Nov. 9 peak, the eurozone benchmark has dropped 27%.

“Short periods of time are much more unpredictable. With a maturity of less than two years, I want a buffer. But for three or four years, I’m looking for more leverage, more upside rather than protection,” he said.

“Even if we have a recession, we should be moving back up four years from now.”

Reshuffling it

Doucette said he would fine-tune the structure of the note to fit his outlook.

“I would either shorten the duration while adding some leverage without changing the buffer. Or I would keep the same duration but give up some of the buffer like 20% to 15%, 10% or even 5% and increase the leverage,” he said.

“Either you shorten the term of the note, or you reduce the size of the buffer. Either way, I would try to get more leverage,” he said.

Never too much

Scott Cramer, president of Cramer & Rauchegger, agreed that the buffer was sizeable. But he valued the downside protection even on a longer-term note.

“It’s a pretty good deal.

“A 20% buffer over four years is meaningful. We should be bouncing back by then.

“But to be fair, it’s always hard to predict. I’d like to see a little bit more downside protection, but I think as it is, it’s worth the tradeoff. You don’t have a cap. You have the return enhancement. The buffer is what it is.”

Allocation tool

Cramer may use option strategies at times to obtain defined outcomes. But he values structured notes for simplifying the process.

“Could you replicate the trade yourself? Probably.

“But for somebody who wants to be long the index and take a little portion of their portfolio in a structured note that gives leverage on one side and downside protection on the other, it’s an easy strategy to implement. For a diversified portfolio, that’s a good construction.”

The bid on notes linked solely to the Euro Stoxx 50 index has gained momentum this year. Data compiled by Prospect News through June 16 showed a tally of $1.14 billion in 139 deals, which is a 20.5% increase from $946 million priced in 179 offerings a year ago.

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes settled on Thursday.

The Cusip number is 48133GB28.

© 2015 Prospect News.
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