JPMorgan’s $14.9 million airbag gears on EAFE index show strong terms in riskier world

By Emma Trincal

New York, Oct. 12 – JPMorgan Chase Financial Co. LLC’s $14.9 million of 0% capped airbag gears due Oct. 8, 2025 linked to the MSCI EAFE index provide competitive upside and downside protection for investors seeking exposure to developed markets at a time of increased geopolitical uncertainty, which the recent Israel-Hamas war exacerbated this week, advisers said.

If the index return is positive, the payout at maturity will be par plus 200% of the index return, subject to a maximum gain of 31.75%, according to a 424B2 filing with the Securities and Exchange Commission. Investors will receive par if the index falls by up to 20% and will lose 1.25% for each 1% that the index declines beyond 20%.

Riding bear markets

Steve Doucette, financial adviser at Proctor Financial, said he did not expect to see those terms on a two-year tenor.

“It blows me away. It’s a two-year and you get this healthy cap, a 20% buffer and 200% on the upside. That’s pretty neat,” he said.

The cap on an annualized compounded basis was particularly attractive for a short-dated security.

“You’re getting up to 15% a year. Who’s going to complain about that?

“If you’re wrong, if we have a downturn, you have this protection on the downside. You can outperform on the downside up to 20% and much more.”

He gave an example.

A 40% decline in the index at maturity would generate a 25% loss to investors. In contrast, the same price drop on a 20% regular buffer would trigger a 20% loss. The 5% difference between the geared buffer and its unlevered counterpart was not significant, he noted.

“If the market is down 40%, you’re still outperforming by 15%. You may have the gearing, but you certainly have a pretty solid level of protection,” he said.

The structure gave investors an edge in a bear market, he added.

“In a bear market, worst-case scenario...you’re 30% or 40% down. That buffer would cut a big chunk of your losses regardless of what might trigger the bear market...whether it’s a recession or the wars intensifying and taking a new turn,” he said.

Upside arrangements

While Doucette said the cap was “healthy,” he would try and rearrange the terms to raise the upside potential.

“Why not lowering the leverage to 150% and get a higher cap? I don’t know how much more I could get. Maybe a 35% cap. It’s just a guess. But I would explore reducing the leverage just to see how much more cap I get,” he said.

For Doucette, there was still a chance to underperform on the upside.

“If the index is up 9% a year – and that’s an average return – you get 18% and you outperform your cap,” he said.

The upside risk increases all the more with an undervalued asset class as is the case with the EAFE, he said.

“The EAFE is 60% Europe and they’ve been lagging for years. I would have to do some due diligence but there’s a real chance to see a reversal to the mean. In that case, you really want to raise that cap,” he said.

Laggard

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said the note was well designed to get exposure to a riskier global environment.

“With this asset class, I do like the short tenor. I wouldn’t want a long-term exposure given the risks,” he said.

At the same time, the valuation of the underlying was attractive.

“The EAFE has underperformed by a wide margin compared to the MSCI World index. So, you could have a recovery, some kind of a rebound in these markets,” he said.

Medeiros said he liked the terms of the notes, which reflected the heightened geopolitical instability.

“You have exposure to developed markets with most of the countries in Western and Southern Europe. We have two hot wars, one in Ukraine and now a new Israel-Hamas war in the middle-East. These conflicts bring additional uncertainty on a global scale. Oil prices may rise due to tight supplies and foreign investments in those regions may be on hold for some time,” he said.

Buffer, cap

These factors raised some concerns about the underlying index.

“I’m a little bit cautious, especially about Europe.

“However, I do like the terms of the note because there is a generous buffer associated with it,” he said.

The adviser said he normally tries to avoid caps in a note. But in this case, he held a different view.

“I don’t mind this cap, which is more than 30% over two years. The index only has to go up 15% over the two-year term to hit the cap since I get 2x leverage. That type of return is not bad considering the lackluster performance of this index,” he said.

The MSCI EAFE index has returned less than 5% a year over the past five years, according to Morningstar.

“This note has a structure that addresses many of my concerns regarding this asset class. I’m not a fan of the EAFE index, but I very much like the structure. It’s a good note,” he said.

J.P. Morgan Securities LLC and UBS Financial Services Inc. are the agents.

The notes are guaranteed by JPMorgan Chase & Co.

The notes settled on Oct. 6.

The Cusip number is 48131C799.

The fee is 0%.

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