JPMorgan’s $4.88 million capped buffered leveraged notes on S&P fail to express specific view

By Emma Trincal

New York, Jan. 16 – JPMorgan Chase Financial Co. LLC’s $4.88 million of 0% capped buffered return enhanced notes due Jan. 22, 2025 linked to the S&P 500 index may disappoint bulls and bears alike given the limited range of downside protection and modest upside potential, according to advisers’ views. \

If the index gains, the payout at maturity will be par plus 150% of the return of the index, capped at par plus 14.085%, according to a 424B2 filing with the Securities and Exchange Commission.

The payout will be par if the index declines by no more than 5%. Otherwise, investors will lose 1.05263% for every 1% decline of the index beyond 5%.

Cost

Steven Foldes, founder and wealth manager of Evensky & Katz / Foldes Financial Wealth Management, pointed to the cost first.

“JPMorgan’s credit is fine. No problem on that end. But the 1% fee seems to me pretty high, especially on a one-year note and considering that you’re giving up dividends,” he said.

The index dividend yield for the S&P 500 is 1.49%.

The 1% fee is disclosed in the prospectus.

Cap

“Usually, a note gives you an opportunity to express a view. This one doesn’t,” he said.

The 5% buffer, he added, was “very modest.”

“If the index is down, it will be down much more than that.”

But with a small buffer, one may expect a high potential return. For Foldes, the mid-double-digit cap was insufficient.

“On the heels of a big recovery last year, I wouldn’t want to be limited to a cap.

“In my view, this 14% level is too low. It eliminates the advantage of having the leverage.”

He said he was not sure who would buy the notes.

“It’s almost a loss/loss.

“There’s not enough downside protection, the cap is very low, it’s expensive and I lose the dividend.”

“Having the 1.5x accelerated return is nice. But that limitation on the upside eliminates the benefit of leverage.

“I’m not sure what view the note expresses.”

Bullish

Foldes explained why he found the cap to be too low based on his market outlook.

“We had a big decline in 2022 and recovered last year. We’re now flat for the last two years,” he said.

“I wouldn’t want to give up the gains of what might be a good year in the market.”

Another reason to be bullish was the widely expected Federal Reserve’s rate cuts in 2024.

“If they lower rates, I see us well above 14%.

But the opposite view was not reflected in the structure either.

“If you are concerned about the market being toppish, if you’re worried about a pullback, a 5% buffer is certainly not going to help you.”

A better note would be one with more downside protection and no cap.

“If you’re defensive, get your protection on the downside. If you’re bullish, get your return. At least have one of those two features, don’t eliminate both.”

The term may have to be extended.

“You may not be able to get what you need on a one-year note. You may have to go a little bit longer. But as it is, I don’t find this note very appealing.”

Liquid alternatives

A financial adviser offered a similar view.

“There’s not much downside protection and you’re losing give or take 2% in dividend. Plus, there is a cap,” he said.

Usually, the cap is there to pay for the downside protection, he added.

He compared the return of the notes with a long position, assuming a 10% price return and a 2% dividend yield.

“With the one-year note, you cap out at 14% while the total return with an index fund position gives you 12%.

“Is it worth giving up liquidity for one year just to get an extra 2%?

“I can get an Innovator ETF with a 9% buffer and a much higher cap.”

Innovator is the brand name of Defined Outcome ETFs sold by Innovator Capital Management, which mimic the structure of buffered capped notes in an ETF format. Advantages of those structured investments include the removal of credit risk exposure and the liquidity associated with exchange-traded products, he explained.

Downside risk

This adviser concluded that the notes would be hard to sell.

Even mildly bullish investors may not benefit from the structure, he said.

“If you think the cap is okay because the index is already high and that it’s going to go up only a tiny bit more, think again. I’m a big believer that when the market is at or near all-time highs, you have to worry about the downside first.

“You’re more likely to have a big pullback than modest gains.

“The note doesn’t address the bearish scenario at all. 5% is nothing.”

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes settled on Jan. 10.

The Cusip number is 48134TQC1.

© 2015 Prospect News.
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