UBS’ $674,000 buffered PLUS on S&P 500 offers ‘well-balanced’ structure

By Emma Trincal

New York, Nov. 17 – UBS AG, London Branch’s $674,000 of 0% buffered Performance Leveraged Upside Securities due Dec. 15, 2023 linked to the S&P 500 index provide the basics elements of a plain-vanilla growth note with enhanced return and downside protection. As always, the question was whether the terms met advisers’ market expectations.

The payout at maturity will be par plus 200% of any index gain, capped at par plus 20%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 10% and will be fully exposed to any losses beyond the buffer.

Buffer

Steve Doucette, financial adviser at Proctor Financial, liked the terms, especially the opportunity to outperform the index although some risks persisted.

“You’re getting a very nice return. A 20% cap on 13-months, that’s more than decent actually,” he said.

On an annualized compounded basis, the cap offers an 18.4% return.

“Nobody is going to complain about this, unless of course the market is off to the races.

“On the downside, if the market is down, you have the buffer to help you.”

It’s impossible to tell if the 10% buffer over the period will provide adequate protection.

“If you believe the market is going to be down another 20% from where we are right now, then it might not be enough. But how much deeper can the S&P go? We’re already down close to 20%.”

Based on the short 13-month tenor, a 10% buffer is probably the best investors may expect, he noted.

“Increasing the buffer would cost you too much,” he said.

The choice of a buffer versus a barrier gave noteholders an advantage over a long position.

“Even if the market drops more than 10%, you’re still going to beat the benchmark. I think 10% gives you a reasonable amount of outperformance,” he said.

FOMO

There was more uncertainty concerning the upside. The cap could lead the notes to underperform the index.

“If the Fed starts to ease off a bit, we may be off to the races. In that case, my concern is we’re going to be capped out,” he said.

“But that’s the only situation where the notes would not outperform.”

In all other scenarios – a declining index or a moderately bullish market – investors should achieve higher returns with the notes due to the leverage and the buffer.

“If the market is up just a little bit, you’ll do great. But the market may not move slowly if it goes up. We’ve seen how quickly these things turn,” he said.

Doucette focused on the upside risk.

“My goal with structured notes has always been to outperform in both directions,” he said.

“On the downside I know that I’m going to outperform no matter what, just by virtue of having a buffer. Could the S&P drop 20% if we’re going into a recession? Yes, it’s highly likely. But you’ll cut your losses in half. So, I still beat the index.”

On the upside, however, Doucette expressed a “legitimate fear of missing out.”

“You could easily leave money on the table. I’m not saying a 20% cap is not reasonable. But you could miss substantial returns if we have a strong recovery.”

Well-balanced structure

Matt Medeiros, president and chief executive officer of the Institute for Wealth Management, examined the performance of the S&P 500 index since the February-March 2020 Covid-induced pullback. He concluded that the cap was attractive.

“We’re now more than 70% higher than at the March 2020 bottom. It took some time because Covid was an external event difficult to interpret, whose ramifications and consequences were hard to predict,” he said.

“Once people understood that the world was not going to end, you had a snapback. It’s not a 100% snapback. But we’re up 70% since the March 2020 bottom. We’re in the recovery stage at this point.”

The market however has been falling since the start of the year due to continuing headwinds, he noted, citing rising interest rates, ongoing political changes, a tight labor market and persisting supply chain challenges.

“That’s why I’m totally comfortable with the cap. Twenty percent exceeds my return expectations, which are more in the mid to high single digits. Most people are not expecting double digit returns over a short period of time. I think the cap is fair,” he said.

Medeiros also liked the downside protection.

“A 10% buffer on a 13-month seems about right to me. It’s in line with the tenor. You couldn’t price a bigger buffer without extending the maturity. And if you did that, you wouldn’t have the same note. You would be dealing with an entirely new set of variables. The leverage point would be different. The cap would be different.”

Medeiros added that the 10% buffer was also “decent” given the current S&P 500 index level from its Jan. 4 all-time-high.

“We’re 17% off the top. A 10% buffer at this level is not like a 10% at the high,” he said.

“I think the structure is well-balanced.

“This is a good note for someone who is cautiously optimistic on the S&P, someone who wants to participate in the upside with a little bit of downside protection.”

UBS Securities LLC is the agent with distribution through Morgan Stanley Wealth Management.

The notes settled on Tuesday.

The Cusip number is 90279FYU9.

The fee is 0%.

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