JPMorgan’s $11.79 million trigger PLUS on S&P Equal Weight to meet low expectations, bear view

By Emma Trincal

New York, Sept. 5 – JPMorgan Chase Financial Co. LLC’s $11.79 million of 0% dual directional trigger PLUS due Nov. 29, 2024 linked to the Invesco S&P 500 Equal Weight ETF should appeal to investors seeking to reduce their exposure to Big Tech in the S&P 500 while having limited growth expectations regarding the overall market, advisers said.

If the ETF return is positive, the payout at maturity will be par plus 200% of the ETF return subject to a maximum return of par plus 11%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive a 1% gain for each 1% loss if the ETF declines but finishes above the 80% principal barrier and they will lose 1% for every 1% decline if the ETF ends below its principal barrier.

Rotation trade

“I like the idea. The S&P Equal Weight has underperformed the S&P for years because all the growth was driven by the big names in tech,” said Tom Balcom, founder of 1650 Wealth Management.

The Invesco S&P 500 Equal Weight ETF equally weights the stocks in the S&P 500 index.

“The idea behind this trade is that we’re about to see a rotation. People will start to be concerned about the lack of diversification in the S&P. They’ll switch to the Equal Weight to be more defensive,” he said.

The Invesco S&P 500 Equal Weight ETF has gained popularity this year as an underlying. A total of $445 million in 51 deals has priced on this ETF so far this year, according to data compiled by Prospect News. Almost all of those offerings have used the Invesco S&P 500 Equal Weight ETF as a sole underlying asset.

Concentration risk

Because the S&P 500 index is capitalization-weighted, it is highly concentrated on a few names, noted Balcom. The top seven companies make for nearly 28% of the index, according to Invesco’s website. Those are Apple Inc., Microsoft Corp., Alphabet Inc., Amazon.com Inc., Nvidia Corp., Tesla Inc. and Meta Platforms Inc.

More than 80% of the S&P 500’s gains seen so far in 2023 are due to the performance of only 10 companies, wrote Frank Holmes, chief executive, and chief investment officer of U.S. Global Investors, in a research report on Tuesday.

“Apple, the iPhone maker, valued at just under $3 trillion, contributed a not insignificant 15.6% to the market’s moves,” he said. Nvidia was responsible for 15.4% of the gains and Microsoft, for 12%,” Holmes wrote.

Laggard

The market cap-weighted index has drastically outperformed the Equal Weight ETF, 19% to 8%.

“Investors in this note are expecting a reversal to the mean. It’s a rotation play, something quite similar to a bet from growth to value,” said Balcom.

“The idea here is that the S&P 500 Equal Weight is going to outperform the S&P.”

The wide range of downside outperformance provided by the absolute return offers a way to hedge the risk of “being wrong,” he added.

“If the S&P Equal Weight is down, you can still outperform in a significant way. The index drops 20% in 15 months, you outperform by 40 percentage points, which is quite significant,” he said.

The 80% barrier in his view provided adequate protection.

“This note will mature three weeks after the Presidential Election. Volatility will go up before the elections but should drop after that. Hopefully, you shouldn’t have much exposure to the election risk by then,” he said.

Hedge

The potential upside return, which is limited to 11%, contrasted with the maximum absolute return, which can extend to 20%.

“Obviously the risk here is to underperform on the upside. Should the S&P 500 Equal Weight jump after 15 months, you will be capped at 11%.

“On the other hand, you have a huge hedge on the downside, which you can use for a variety of allocations in the portfolio.

“This is a bet on a less volatile environment. You’re not going to make a lot on the upside. But you can definitely protect some portions of the overall portfolio and outperform in a down market,” he said.

Up and down

Investors buy the Invesco S&P 500 Equal Weight ETF outright to eliminate concentration risk, a financial adviser said.

“People use this ETF to avoid being overly exposed to Apple and the other mega cap stocks,” he said.

However, the structure of the notes with its emphasis on the absolute return reflected a different market view, he said.

“It looks more like a bear market play. You don’t have high expectations of return from the ETF given the low cap. With 2x the upside, it wouldn’t take long to reach the cap,” he said.

The cap of 11% over a 15-month period is the equivalent of an 8.7% annualized compounded return. With an ETF returning less than 4.5% a year, investors would be able to reach the upside cap.

“It’s very easy to pass the cap so you would have to be quite pessimistic,” he said.

The payout structure on the downside was different.

“You can definitely make more on the downside, but you don’t have any leverage,” he said.

“If the ETF is down 2%, you’ll only make 2%. It’s still better to get the absolute return than a loss. But not having any leverage may hurt you if the market trades sideways within a narrow range.”

Gloomy outlook

The rationale behind investing in the notes was similar to that of buying the ETF outright.

“The concern is that the top companies in the S&P have done so well, there will be a pullback coming up,” he said.

“It’s designed for people who have low growth expectations for the S&P and who want the ability to make money in a down market,” he said.

“I’m not sure why they picked the Equal Weight version of the S&P rather than the S&P itself. It may have to do with pricing, but I can’t speak to that.”

“It’s for investors who don’t feel confident about the stock market and the economy in the next 15 months. It’s a way for them to make money on the downside. They’re certainly not looking for big gains on the upside.

“It’s fair to say that it’s a bit bearish.”

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent. Morgan Stanley will act as distributor.

The notes settled on Aug. 29.

The Cusip number is 48134AHJ7.

The fee is 2.25%.

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