JPMorgan’s $1.05 million leveraged worst-of notes offer international play, high cap

By Emma Trincal

New York, June 23 –Advisers like to renegotiate the terms of the notes they consider investing in. But with a recently-priced JPMorgan leveraged buffered note on two international equity underliers, only minor changes to the buffer size were suggested as the upside was unusually compelling.

JPMorgan Chase Financial Co. LLC priced $1.05 million of 0% capped buffered return enhanced notes due June 18, 2026 linked to the performance of the Euro Stoxx 50 index and the iShares MSCI EAFE ETF, according to a 424B2 filing with the Securities and Exchange Commission.

If each underlier finishes above its initial level, the payout at maturity will be par plus 175% of the least performing underlier’s return, subject to a maximum upside return of par plus 103.05%.

If the final level of the least performing underlier falls by up to 15%, the payout will be par. Otherwise, investors will lose 1% for every 1% that the worst performer declines beyond 15%.

No FOMO

“I really like the terms of this note,” said Steve Doucette, financial adviser at Proctor Financial.

He first pointed to the unusually high cap of 103.05%, which, on an annualized compounded basis, is the equivalent of a 26.65% return.

“Three years out, that’s not a bad cap. Who’s going to complain about 27% a year?”

Another advantage was the high positive correlation between the underliers whose respective exposures – the eurozone for the index and developed markets except U.S. and Canada for the ETF – overlap. European equities have a 61% weight in the EAFE ETF. As a result of this overlay the underliers show a 0.96 coefficient of correlation to each other.

“The exposure is overwhelmingly European,” said Doucette. When I look at valuations, especially after the runup in U.S. stocks, Europe looks like a good place to be,” he said.

The Euro Stoxx 50 index underperformed the SP 500 index during three consecutive years starting in 2019.

“If we do end up having a recession and come out of it, we could see a rebound in the economy and the markets of this part of the world.”

10 over 15

The structure was appealing although Doucette suggested a minor change on the downside.

“Do I need a 15% buffer or would 10% be enough? Cutting it to 10% would be nice if I could boost the leverage or the cap,” he said.

Perhaps the leverage would be the moving piece as the cap could hardly be stretched higher, he added.

“Typically, we get 10% to 12% in average return on the cap. So, I’m not going to worry about a 27% cap.

That’s the kind of cap that takes care of any client’s fear of missing out, mine included. How much gain could you be missing, especially after this rally?”

Outperformance in mind

Very few advisers would be comfortable reducing a buffer. But Doucette stressed the rationale behind it.

“With a buffer you’re going to outperform no matter what. The market is down. Having a 10% versus a 15% buffer doesn’t seem to make that great of a difference to me.

“The key is to know what you’re going to get by reducing that buffer. If it’s more leverage, how much more can you get? What about a higher cap? You just want to know the parameters.”

Overall, this adviser liked the notes.

“The terms are very appealing,” he said.

Part of the appeal had to do with the fee which amounts to 0.91908%, according to the prospectus.

“On a three-year, that’s intriguing. That’s probably the lowest fee you’re going to see.”

Recovering asset class

Matt Medeiros, president and chief executive of the Institute for Wealth Management also expressed a positive view on the structure, especially the upside.

“I like this note. I like the underliers. They have recovered quite a bit from their lows a year or so ago,” he said.

“The cap is super attractive.

Even if the worst-performing asset doubled in price over the period, investors would still outperform with a 103.05% return, he noted.

“As we can continue to stabilize the economy across the world, there are some good opportunities in this asset class.”

Buffer up

But for Medeiros, the focus was on the downside.

“If I was to have the perfect note, I would try to get a 20% buffer,” he said.

“But given the way this note is structured, I’m willing to sacrifice some of the downside buffer for the high cap.”

Still, it made sense to explore the possibility of increasing the buffer from 15% to 20%.

“It’s always worth trying,” he said.

“As always everything is based on pricing. What would a 20% buffer cost me in reducing my upside? How much am I willing to give up on the cap or on the leverage?

“Terms depend on how you want to factor the benefits as well as the costs.”

Medeiros also liked the low fee.

“What they’re putting out there is a very low-cost structure, which really helps pricing.

“I like those leveraged buffered notes. With the market as uncertain as it is today, it’s the right time to invest in those types of securities.”

Moving in synch

While high correlations are not recommended to diversify a portfolio, they reduce the dispersion risk with a worst-of.

“I like the high correlation between the underliers. It makes it very easy to track the performance, which is important when you want to budget your risk,” he said.

Investors are getting international equity exposure with a heavy weight in Europe.

“I’m not too concerned about risk. Historically, both the index and the ETF have consistently moved together and most likely will continue to do so for the next three years.”

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes settled on June 20.

The Cusip number is 48133XQX7.

© 2015 Prospect News.
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