Scotia’s $11 million autocall buffer notes on iShares Russell ‘OK but not great,’ adviser says

By Emma Trincal

New York, Jan. 8 – Due to what they perceived as a weak buffered protection, advisers were not enthusiastic about Bank of Nova Scotia’s $11 million of 0% autocallable contingent coupon buffer notes with memory coupon due Jan. 7, 2025 linked to the iShares Russell 2000 ETF.

The notes will pay a contingent monthly coupon at an annual rate of 11.5104% if the ETF closes at or above its coupon barrier, 85% of its initial level, on the related observation date, according to a 424B2 filing with the Securities and Exchange Commission.

Previously unpaid coupons will also be paid.

The notes will be called at par plus the coupon if the ETF closes at or above its initial level on any monthly observation date prior to the final valuation date.

The payout at maturity will be par plus the coupon unless the ETF finishes below the 85% buffer, in which case investors will lose 1.1765% for each 1% decline of the ETF beyond the 10% buffer.

Compounded losses

“It’s a decent income-generator. With 11.5%, you get a good premium to Treasuries,” said Scott Cramer, president of Cramer & Rauchegger.

“The protection is OK but not great.”

A negative point was the lack of any call protection with a monthly automatic call.

“Clearly the risk is that it gets called. You have to live with that. But getting close to 1% a month is still a reasonable risk-return,” he said.

His main criticism was the amount and type of downside protection.

“I don’t like geared buffers, which compound the losses on the downside. Personally, I buy these notes for the protection. I also don’t think 15% is very generous,” he said.

One positive item was the memory.

“This is nice. If you get called away really early, it’s not going to help. But if you miss a few coupons, at least you can catch up.

“Overall, it’s an OK deal. But the monthly call and the protection aren’t so great. So, I’m not really excited about it,” he said.

Banking on banks

Ken Nuttall, chief investment officer at BlackDiamond Wealth Management, said there was upside potential in the ETF.

“The Russell really caught up. It all happened in November and December,” he said.

The Russell 2000 index rose 15% in 2023.

“People are saying that small caps are the place to be this year because this area has underperformed so much.

“Half of the companies in the Russell are not profitable. A lot are banks, very small regional banks. That’s one of the reasons the Russell underperformed so much last year with the regional banking crisis putting those stocks under pressure.

“When rates fell in November and December, banks had a big move up,” he said.

Financials and industrials are the top two sectors in the iShares Russell 2000 ETF, each with approximately 17% of the fund’s market value.

Call risk, memory

The monthly autocall was also an issue for this adviser.

“Even though you’re getting 0.96% a month, I don’t like when you almost immediately get called out. A lot of work gets wasted too soon,” he said.

He pointed to two positive features.

“I like that it’s linked to only one index as opposed to the three you usually see.

“I also like the memory. It’s a nice little feature,” he said.

But he found the 15% buffer disappointing, arguing that the Russell 2000 can drop 15% or more in just a couple of months.

“15% is a bit too tight for me, and I don’t like getting geared down if I pass the 15% level. It could be a little rough.

“I don’t think it’s a bad trade. 11.5% is a good return. But there’s too much downside risk,” he said.

Nuttall said that as a result, he would not categorize the note as an income play.

“It’s more of an equity replacement. Compared to a long position, at least you get a little bit of protection,” he said.

Downside risk

Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, also focused on the downside risk, which he said was too elevated.

“The Russell has been underperforming for a while except in the fourth quarter,” he noted.

“But it hasn’t done as well as the other benchmarks mainly because higher interest rates affect small-caps more than they do affect large caps.”

If the Federal Reserve cuts rates this year, small-cap stocks could “take off,” he said.

“But with all the indexes flirting with all-time highs, the Russell may not break out on the upside.”

In fact, Chisholm said the Russell could drop as much as 40% or even more over the period.

“I don’t love anything that doesn’t have a lot of protection and 15% is not a lot, which makes the 11.5% return unappealing. The risk-return is just not very attractive,” he said.

Scotia Capital (USA) Inc. is the agent. J.P. Morgan Securities LLC is the placement agent.

The notes settled on Friday.

The Cusip number is 06417YZX0.

The fee is 0.1%.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.