JPMorgan’s $4 million autocalls on index, ETFs offer double-digit yield, 65% barriers

By Emma Trincal

New York, Oct. 31 – JPMorgan Chase Financial Co. LLC’s $4 million of autocallable contingent interest notes due Oct. 28, 2027 linked to the MSCI EAFE index, the SPDR S&P 500 ETF Trust and the iShares Russell 2000 ETF provide some “good downside protection,” an adviser said, while another adviser would prefer a longer maturity for added safety.

Investors will receive a coupon of 11%, paid quarterly, if each underlier closes at or above its 65% trigger level on the related quarterly observation date, according to a 424B2 filing with the Securities and Exchange Commission.

The securities will be called automatically at par if each underlier closes at or above its initial level on any quarterly review date starting Oct. 23, 2024.

At maturity, the payout will be par unless the worst performing asset finishes below its 65% trigger level, in which case investors will be fully exposed to the decline of the worst performing asset.

Back testing

Julian Rubinstein, chief executive of American Asset Management, said the structure could be made less risky.

“I would prefer a longer maturity. Your chances of breaching are much lower,” he said.

Rubinstein conducts back testing to assess the risk-reward of a note. He measures the frequency of specific drawdowns for a given period.

He found that every four years on a daily basis, the worst of the three underliers of the deal will drop more than 35% – hence breach the barrier – 2.5% of the time.

“Most advisers would be happy with that probability. It’s not bad at all. But personally, I’d like to see something closer to a 0% chance of breaching,” he said.

Risk mitigation

Part of the “problem” was the inclusion of the MSCI EAFE index, according to this adviser.

“The EAFE is more likely to be the worst performer,” he said.

Rubinstein strives to mitigate risk as much as possible with his portfolio of income notes.

“I’d rather give up some yield and mitigate the risk a little bit more,” he said.

As an example, and through his model, he found that a five-year note with a 60% barrier would only have less than a 1% chance to breach at maturity.

“That’s literally a never-breach setup,” he said.

“Granted, I would lose some yield. How much? I would have to price it, but I’m guessing I could get a 9% coupon.

“If giving up 2% in yield allows me to drastically cut the downside risk to almost zero, that’s a much better deal to me.”

If he had to reconstruct the notes, Rubinstein would extend the tenor and eliminate one of the underliers.

“I would do a six-year; I would swap the EAFE for the Dow; that way I could reasonably cut the barrier size to 25% and hopefully keep the same coupon. I would have to price it up, but I’m pretty sure I could get a great coupon,” he said.

Depressed levels

Tom Balcom, founder of 1650 Wealth Management, was satisfied with the level of risk associated with the notes. The entry points for each underlying offered additional safety to investors, he said.

“The S&P last week was technically in correction, down 10% from its July high,” he said.

“The Russell is not in good shape either.”

The iShares Russell 2000 ETF is nearing bear market territory, he noted. The ETF was down 18.2% from its high of February. The deal priced at $165.03 a share. Moreover, this underlying hit a 52-week low on Friday at $161.67, not too far from the initial level of the note.

The MSCI EAFE index is in correction mode, down more than 10% from its late-July high, he added.

“These levels give you very good entry points in addition to the 35% barrier, which is pretty substantial. Usually, barriers on indices are more like 70% or 75%,” he said.

Dispersion, volatility

One reason for the improved protection aside from current valuations was the inclusion of an international equity index to the mix in addition to the two U.S. benchmarks.

“The S&P and the Russell have a relatively high correlation to one another. The EAFE on the other hand is not very much correlated to the other two,” he said.

“That’s going to give you more protection.”

Another factor was volatility.

“The Russell is the most volatile of the three, historically. It could be the worst of.

“But I think that what gives the most juice to the notes here is the recent volatility spike in the market seen over the last couple of months,” he said.

The VIX index hit a one-year low on Sept. 15 at 12.68 following a higher low of 13 two weeks earlier. It jumped to 23 last week, before decreasing again since.

“This brief but sharp volatility spike has allowed the issuer to provide some good downside protection,” he said.

No-call, yield

Another attractive feature in the note was the one-year no-call even though such a feature was not unusual for longer-dated notes, he said.

“When advisers have to reposition their assets because the note gets called after three or six months, it’s more work involved, and reinvestment risk becomes an issue. I do like having that one-year no-call.”

Balcom also liked the 11% coupon.

“The equivalent Treasury would yield less than 5%. You’re getting a spread of more than 6%. I think they’re really compensating you for the risk.

“Of course, if the market has a nice run, you will underperform. But the whole idea of giving up some of the potential upside is to get the downside protection.

“I can see myself allocating this to the equity portion of the portfolio and use it as a hedge,” he said.

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes settled on Friday.

The Cusip number is 48134B7F4.

The fee is 0.25%.

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