JPMorgan’s $1 million uncapped leveraged notes on Russell 1000 Value seen as appealing

By Emma Trincal

New York, Oct. 23 – JPMorgan Chase Financial Co. LLC’s $1 million of 0% uncapped buffered return enhanced notes due Oct. 16, 2026 linked to the Russell 1000 Value index surprised advisers by the high leverage combined with uncapped return over a relatively short period. They suggested improvements while conceding that the notes were already priced attractively.

If the index gains, the payout at maturity will be par plus 231% of the return of the index, according to a 424B2 filing with the Securities and Exchange Commission.

The payout will be par if the index declines by no more than 10%. Otherwise, investors will lose 1% for every 1% that the index declines beyond 10%.

Creditworthiness

“This is a very interesting note,” said Steven Foldes, wealth manager and founder at Evensky & Katz / Foldes Financial Wealth Management.

“First, we have no problem with the issuer’s credit. JPMorgan has by far the tightest spreads among the big U.S. banks.”

The credit default swap spreads of JPMorgan are 73 basis points, versus 95 bps for Morgan Stanley and Citigroup; 93 bps for Wells Fargo; 106 bps for Bank of America; and 107 bps for Goldman Sachs, according to S&P Global Market Intelligence.

Mean reversal

“We like value. It’s a bias we have in our portfolio. Some years are better than others and it’s fine,” he said.

The Russell 1000 Value index underperformed both the Russell 1000 index and the Russell 1000 Growth index from 2018 through 2021.

“This index has underperformed for a number of years relative to the Russell 1000 Growth, so you’re starting at a low base, which we like,” he said.

During last year’s bear market, however, the Russell 1000 Value index outperformed both the Russell 1000 and the Russell 100 Growth indexes.

Last year, however, the Russell 1000 Value index, while posting a negative return, outperformed its growth counterpart by nearly 22%. It also outperformed the Russell 100 by nearly 12%.

High multiple

The leverage multiple of 2.3 was one of the most attractive characteristics of the offering.

Foldes said he could settle for the three-year tenor despite his inclination to buy shorter-dated notes in general.

“Normally we would prefer to see a two-year. But in this case, we don’t have a big problem with the three-year maturity given the amount of leverage that JPMorgan is offering,” he said.

The buffer was subject to negotiation.

“Clients like buffers. It’s always nice to have. But a buffer may not be needed on a three-year note.

“It would be interesting to price the note without the buffer and see if there is a substantial differential of leverage. If so, it might be compelling to go without the buffer, but it would have to be a substantial difference,” he said.

One of the benefits of the leverage was to make up for the loss of dividends, he said.

The dividend yield of the Russell 1000 Value index is 2.21%.

“You’re losing three-years’ worth of dividends but the leverage is making up for it,” he said.

Foldes also liked the 0.75% fee, saying that it was “very reasonable.”

“It certainly is an attractive note. We will pursue the conversation to see other iterations, and might, in fact, use this in our portfolios,” he said.

No-cap, leverage

Ken Nuttall, chief investment officer at BlackDiamond Wealth Management, was surprised by the terms.

“I’m almost shocked. The dividend yield is higher than the S&P but not crazy high, so it’s not like they used the dividends to price that kind of leverage,” he said.

Nuttall was particularly impressed by the fact that the high leverage came without a cap.

“Over a three-year and without adding an autocall, that’s pretty amazing,” he said.

Diversification

The underlying investment theme was timely.

“Everybody talks about the big tech stocks, the Magnificent Seven. But at some point, we’ll see a rotation toward value. Value hasn’t done so awesome this year. But a lot of people believe it’s due for a comeback.

“I’m actually in that camp. Value stocks are not overpriced like the Magnificent Seven,” he said.

Having a different kind of underlying was also a positive.

“Most notes are done on the S&P. It’s good to be able to diversify across different asset classes,” he said.

The $1 million deal size was not unusual in his view.

“Maybe JPMorgan wanted to get rid of a position,” he said. “But I think it’s more like an advisory size especially in the middle of the month.”

One tweak

If Nuttall had to modify the structure, he would focus on the downside protection.

“I would personally like to see a little bit more of a buffer on it.

“For a three-year note, I usually need a 20% buffer. You’re more likely to go down 20% on a three-year than on a five-year.

“We try to replace our ETFs with those notes, so I want the downside,” he said.

If it meant lowering the leverage multiple, Nuttall said he would be open to the idea.

“Give me that three-year with a 20% buffer and 1.8x leverage and I would be very happy with that,” he said.

But again, Nuttall was also “happy” with the notes as they were.

“It’s almost as if I was trying to find something wrong with it. But to be fair, this is a pretty good note,” he said.

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes settled on Oct. 18.

The Cusip number is 48134BB93.

The fee is 0.75%.

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