UBS’ buffered contingent income autocalls on Invesco QQQ structured for range-bound outlook

By Emma Trincal

New York, April 6 – UBS AG, London Branch’s buffered contingent income autocallable securities with memory coupon and downside leverage due April 16, 2024 linked to the Invesco QQQ Trust, series 1 provide unusual terms but are not for everyone. The range-bound view embedded in the product may not be in accordance with the volatility of the underlier, an adviser said.

If the fund closes at or above the downside threshold level, 85% of the initial share price, on the observation date for that month, the notes will pay a contingent payment that month at an annualized rate of 14%, plus any previously unpaid coupons, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par plus the contingent coupon if the fund closes at or above the initial share price on any monthly determination date other than the final determination date.

If the final share price is greater than or equal to the downside threshold level, the payout at maturity will be par plus the final contingent coupon.

If the final share price is less than the downside threshold level, investors will lose 1.1765% for each 1% loss beyond the 15% buffer.

Call, buffer

“It’s a very creative note. But with the volatility of the asset class, most likely you’re going to get called,” said Steve Doucette, financial adviser at Proctor Financial.

“QQQ is up. You might collect 1.17% in the first month. I guess it’s still 14% annually.”

The Nasdaq has rebounded since the fall, gaining 15.5% for the year compared to a 12% decline during the same period last year. In 2022, the tech-heavy index lost a third of its value.

The Invesco QQQ ETF tracks the performance of the Nasdaq-100 index.

The buffer provides some protection, but its size is too small.

“QQQ is up a lot. Who knows where it could be one year from now? The first 15% are protected. It could be down a little bit more and you’d be okay with the buffer. But 15% is nothing for QQQ. It could drop 15% in four days. If it’s down 30% or 40% you’re in trouble. So, you run a lot of risk to try and collect a 14% coupon,” he said.

Theoretically, the downside leverage could bring the value of the investment down to 0% although such an “Armageddon scenario” was very unlikely, he noted.

Memory

With notes paying a fixed coupon, investors can use the paid income as an additional cushion if the underlying is negative at maturity. But it’s not the case when the coupon is paid on a contingency basis, he said.

“You may only have a portion of your 14% coupon at maturity.

“The memory is great. But it depends on when you get paid.”

Doucette, however, said he liked the terms of the notes.

“You have all sorts of new and different things in there. There’s a buffer while usually those autocalls are sold with a barrier. There’s the memory coupon. That memory feature, typically comes with the premium only.”

Range bound

This adviser’s main objection to the notes was the implicit market outlook.

“The way you make money with this note is really if the index is range-bound,” he said.

“You take unlimited downside risk for a limited upside of 14%.

“If you’re comfortable enough to predict that QQQ will be range-bound in the next 12 months, you are a soothsayer.”

The payout in every autocall is always asymmetrical, he admitted. The upside is capped by the coupon and the downside is unlimited due to the use of a barrier or more rarely, a geared buffer as with this product.

But Doucette said he likes autocallable products for income. He just buys them selectively.

“The way we’ve done it is with a three-year, 60% barrier on a more stable market, not QQQ.”

Countless features

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said he liked the “parts” of the structure, but not the “whole.”

“My first impression about this note is that it has a lot of moving parts, which makes it very difficult to analyze as a whole.

“I see it as a more speculative type of investment, not so much because of the terms but because you can’t really get a grasp on it; you can’t really get a sense of your chances of achieving a desired outcome.

“It’s a challenge.

“If I liked QQQ, I would probably choose to be long the fund, not so much because it’s a better position to be in, but simply because I understand it.”

Terms vs. risk

The 14% limit on the upside was not a problem.

“The underlying is attractive. I wouldn’t be too worried about the cap because the reality is, you’ll probably get called before you get even close to the cap,” he said.

“Besides 14% a year is nice. The cap doesn’t bother me.”

Medeiros did not mind the automatic call.

“Sometimes people are concerned about the reinvestment risk. I’m not. If it’s called, I know I can easily replace it. There is so much inventory out there. There would be something just like that next week,” he said.

Medeiros did not contest the value of the buffer either.

“A 15% buffer for a short-term note is relatively generous. Usually on a two-year you can’t get more than 10% if that.”

Almost every term was acceptable, or even attractive in some cases, for this adviser. But the end-product was not a match for his portfolio.

“There are so many different components, it would be very difficult for me to position the notes in a risk-budgeted allocation strategy,” he said.

“I couldn’t put it in income. Too much risk. I couldn’t put it in equity. It’s capped.

“I understand the product. But how does it fit into my strategy? Or does it?”

UBS Securities LLC is the agent and Morgan Stanley Wealth Management is the dealer.

The notes priced on Wednesday and will settle on Tuesday.

The Cusip number is 90279GCT4.

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