Advisers compare two UBS notes on S&P, Russell, respectively, with identical annual cap

By Emma Trincal

New York, Nov. 30 – Advisers assessed two UBS leveraged capped notes, which offer nearly the same annual maximum return but through the use of different terms and distinct underliers.

Large, small caps

The first deal was UBS AG, London Branch’s $5.24 million of two-year capped buffer gears linked to the S&P 500 index.

The payout at maturity will be par plus double any index gain, capped at par plus 20.8%, according to a 424B2 filing with the Securities and Exchange Commission.

The downside included a 15% buffer.

The second offering provided exposure to the small cap universe via the iShares Russell 2000 ETF.

A barrier on the downside allowed for 25% of contingent protection. On the upside, the payout was three times any gain capped at 32.35%.

Sideways

“I’d combine the two and work the magic,” said Steve Doucette, financial adviser at Proctor Financial.

“If you buy either one of these, you think the market is going to trade sideways for two or three years and you’re locking your money up for that timeframe just to get 10% a year. If the market is range bound, that’s how you’ll outperform.

“You’re more bearish or range bound than anything.”

Entry points

The annualized compounded return is 9.9% for the notes on the S&P 500 and 9.8% for the Russell-linked notes.

“It’s a decent return unless the market really moves in either direction,” he said.

Doucette said he was “not a big believer” in range-bound trades.

“The entry point for the Russell is great. You could have a big jump,” he said.

The Russell 2000 is down 26% from its all-time high of November 2021. The S&P 500 index is only 5.6% off its high of January 2022.

“The market in general moves so fast. In two or three years we could have had a recession and come back up. Either one of those indices could perform very well. I wouldn’t want to be capped at 10%,” he said.

Doucette said he wanted the range of each payout to expand, especially on the upside.

Repackaging

Instead of using one or the other, Doucette said he would repackage the two notes into one using a worst-of payout.

“The truth is I don’t like either of them.

“I could look into putting the indices in an equal weight basket. But when you do that, your range gets slaughtered.

“You’d have to run the worst-of to be able to get something decent,” he said.

Doucette said he would prioritize the potential for gains.

Adding the worst-of would give him some flexibility. But he still may have to change other terms in order to capture more upside.

“I would try to get rid of the cap and would reduce the leverage for that. If it’s not enough, I would go out longer. At the end of it all, I would decide what type of downside protection makes sense,” he said.

Asset allocation

Matt Medeiros, president and chief executive of the Institute for Wealth Management, examined the notes from an asset allocation standpoint using them as core holdings in a portfolio.

“When you look at those two offerings, you’re talking about two different underlying, which I see as two components of a portfolio. If you compare them, it’s about creating a portfolio, not so much about buying a security.”

Medeiros said the notes were difficult to compare.

“I can’t say which one I like better.

“The S&P had a much better return for the year. The Russell has barely moved,” he said.

The S&P 500 index has gained 19% year to date versus less than 3% for the Russell.

The two-year tenor on the S&P 500-linked note was attractive, he added. His reasoning was based on portfolio construction and asset allocation.

“The strong performance of the S&P is mostly driven by less than 10 stocks, which are known as the Magnificent Seven,” he said.

Those seven stocks – Microsoft Corp., Apple Inc., Amazon.com Inc., Nvidia Corp., Meta Platforms Inc., Alphabet Inc. and Tesla Inc. – have a weighting of approximately 30%.

“Hopefully other companies and other sectors will pick up as they perform better. But it’s not going to happen overnight. I like the two-year tenor because I think two years is a good timeframe for the S&P to reconstitute. Once the weighting of the Magnificent Seven starts to shrink to the benefit of other sectors of the market, you can begin to reevaluate and reweight your position.

“At maturity, I will be in a position to readjust my allocation to the S&P. I think it’s a good thing,” he said.

Medeiros also considered the respective entry points between the two indexes.

“The S&P had a good run. The cap and leverage are sufficient. But the Russell has underperformed a lot. So, I would prefer to see a higher cap on this one,” he said.

UBS Financial Services Inc. and UBS Investment Bank are the agents for both offerings, which settled on Thursday.

The fee for the S&P notes (Cusip: 90301Q331) is 2%.

The fee for the Russell-linked notes (Cusip: 90302Q769) is 2.5%.

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