JPMorgan’s $1.1 million of leveraged notes on indexes offer big tech exposure, uncapped upside

By Emma Trincal

New York, Feb. 22 – JPMorgan Chase Financial Co. LLC’s $1,097,000 of 0% uncapped accelerated barrier notes due Feb. 19, 2027 linked to the lesser performing of the S&P 500 index, the Russell 2000 index and the Nasdaq-100 Technology Sector index present structural advantages such as uncapped leveraged participation over three years. But advisers spent more time analyzing the worst-of components given the heavy technology exposure and the buoyant bull market in the sector.

If the worst performing index gains, the payout at maturity will be par plus 166.55% of the return of the worst performing index, according to a 424B2 filing with the Securities and Exchange Commission.

The payout will be par if the worst performing index declines but finishes above its 70% barrier. Investors will lose 1% for every 1% that the worst performing index declines if it closes below its barrier.

Small-cap

“It gives you U.S. exposure, it has leverage, it’s uncapped and it’s a worst-of,” said Steve Doucette, financial adviser at Proctor Financial.

While it was challenging to predict which of the three indexes would be the lesser performing one, one at least may rebound, he added.

“The S&P has done well. The Nasdaq and Nasdaq Technology have done well. But the Russell has been underperforming for a while. It may be coming back up. I doubt that it would be lagging. But again, who knows? If small-caps are doing poorly, you have to decide if you’re comfortable having exposure to this asset class three years out,” he said.

Tech bull market

Doucette said that the two other indexes could be lifted by the momentum around technology and artificial intelligence.

On Thursday, the stock price of Nvidia Corp. rose by $110.66, up 16.4%, after the semiconductor company reported better-than-expected quarterly earnings the night before. The news fueled a broad rally taking the S&P 500 index to a new record high at 5,094.39. The Nasdaq-100 Technology Sector index jumped nearly 4% on the day.

“All this momentum in tech.... will it continue for one, two or even three years? It seems like the market is unstoppable,” he said.

“If we have another year or two like this, it will give the note some additional protection even if we have a bear market at the end.”

Nvidia

Doucette said that he was relatively optimistic about the strength of the tech sector.

“Sometimes it’s not the fundamentals that matter. Right now, AI is what’s pulling the market up. Look at Nvidia not just today but for a while.”

Nvidia has gained 59% this year and is up 232% over the past year. Since a low in mid-October 2022, the stock has increased nearly seven-fold.

Meta Platforms Inc., another AI pick since the company invested in the generative AI space, has seen its share price jump five-and-a-half times since its November 2021 bottom.

Pricing

Despite the “exciting strength” of the sector to which investors may be exposed, Doucette said he was “not taken aback” by the terms of the notes.

“Getting a three-year uncapped leveraged note is no longer out of the ordinary. You can always get an uncapped. Just put out a bid,” he said.

As he uses a fintech platform to create notes that fit his requirements, Doucette said that competitive bids can make a real difference for advisers.

“It blows me away how issuers can be so far apart. I’ve reached the conclusion that some issuers are not pricing properly,” he said.

Creativity wanted

The worst-of payout, he noted, was not so different from the typical three indexes used in most products – S&P 500, Russell 2000 and Nasdaq-100.

“If you plot the Nasdaq-100 and the Nasdaq-100 Technology Sector, it’s clear that they move pretty much in synch. It’s just that the Technology one is more volatile. But they’re both tech indices,” he said.

The implied volatility of the Nasdaq-100 index is slightly above 16. The Nasdaq-100 Technology Sector index has an implied volatility of 22.

“I’m not sure it makes a huge difference honestly,” he said.

In conclusion, Doucette said the note was “uninspiring.”

“It’s a standard leveraged note for investors looking for U.S. equity exposure. But there’s nothing overly exciting about it.

“I would say to the issuers: show me something new.”

High and rich

Matt Medeiros, president and chief executive of the Institute for Wealth Management, noted the high valuations of some of the underlying indexes. But the duration attenuated some of the market risk.

“The market has priced in some growth and got a little bit ahead of itself. Tech stocks are expensive, and the indices are priced higher than what I would like to see,” he said.

“But having a three-year term gives me a little bit of comfort. If the market gets volatile, in three years, you have a chance to recover.”

Mildly bullish

The 1.67 times leverage may fit a moderately bullish view.

“Because the S&P and the Nasdaq-100 Tech have gone up so much, I have modest growth expectations on those two indices,” he said.

The Nasdaq-100 Technology Sector index has risen 12% this year while the Nasdaq-100 index has gained 9.5%. The Russell 2000 index is mostly flat for the year, down 0.5%.

Such returns made the case for leverage.

“The return enhancement is very attractive relative to my expectations. If the gains are modest, having 1.67 the upside without a cap is definitely attractive,” he said.

Tech-heavy

Medeiros analyzed the underlying components of the worst-of.

“All three indices have heavy tech weightings, and I would say even the Russell 2000 to some degree,” he said.

The most heavily tech-weighted underlying was naturally the Nasdaq-100 Technology Sector index, which tracks in equal weight the stocks of the Nasdaq-100 index classified as technology.

The S&P 500 index is also a tech benchmark, he added. The technology and communications services sectors represent more than 38% of the index.

Magnificent Seven

“Most of the returns of the S&P 500 index derive from the so-called “Magnificent Seven,” he said.

The term designates a group of seven mega-cap technology stocks, which have been driving the AI-related market rally since last year. Those are Apple, Microsoft, Amazon.com Inc., Nvidia, Alphabet Inc., Tesla Inc. and Meta Platforms Inc. Combined the “Magnificent” make 29% of the S&P 500 index’s market capitalization.

While broader, the Russell 2000 has more than 16% in technology and communications.

“The good thing is that you have a pretty high correlation between the three indices,” he said.

“On the other hand, we had such a long run of technology outperformance that if there is some shift or sector rotation tech may start to underperform.”

Medeiros said that no one could tell how long the tech rally could last.

“But I’m comfortable with the 70% barrier given the three-year tenor. I also like the uncapped leverage.

“I think that overall, it’s an OK note,” he said.

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes settled on Feb. 22.

The Cusip number is 48134WJX6.

The fee is 0.95%.

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