JPMorgan’s $6.22 million autocalls on Nasdaq-100 Technology to reduce exposure to Mag 7

By Emma Trincal

New York, Feb. 26 – JPMorgan Chase Financial Co. LLC’s $6.22 million of 0% autocallable accelerated barrier notes due Feb. 20, 2026 linked to the Nasdaq-100 Technology Sector index provide a more diversified alternative to a Nasdaq-100 index play, advisers said. The structure combining an autocall and leveraged uncapped participation at maturity could appeal to a wide range of investors, but the uncertain outcome made the security difficult to position in a portfolio.

If the index gains, the payout will be par plus 125% of the index return. Investors will receive par if the index declines but ends at or above its 65% barrier, and they will lose 1% for every 1% that the index declines if it finishes below the barrier level, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called automatically on Feb. 24, 2025 at a premium of 13% if the index closes above 100% of its initial value.

Barrier

“13% is pretty good for one year. The 65% barrier is OK too,” said Ken Nuttall, chief investment officer at BlackDiamond Wealth Management.

“If you don’t get called and the index is down, what are the chances that it will drop more than 35% in two years? You’ll probably be fine. At least you should get your money back,” he said.

Recent trend

Nuttall noticed a growing number of notes linked to the Nasdaq-100 Technology Sector index.

“A lot of people are using it. I’ve seen this trend maybe over the past six months,” he said.

The index is an equal-weighted, price-return index designed to measure the performance of the technology companies in the Nasdaq-100 index.

“People are using the Nasdaq Tech combined with the Nasdaq-100 when they do a worst-of because those two indices are highly correlated,” he said.

A greater correlation between underliers will reduce the risk of principal loss as well as the risk of not getting paid.

Mag 7 exposure

The Nasdaq-100 Technology Sector also offers the advantage of adding diversification to a portfolio.

“People use it to avoid being disproportionally concentrated on the Magnificent Seven,” he said.

The term “Magnificent Seven” refers to a group of seven mega-cap technology stocks comprised of Apple Inc., Microsoft Corp., Amazon.com Inc., Nvidia Corp., Alphabet Inc., Tesla Inc and Meta Platforms Inc.

Those stocks represent more than 40% of the market capitalization of the Nasdaq-100 index but their weight is much more limited in the equal-weighted Nasdaq-100 Technology index.

“Using the Nasdaq Tech is a little bit like using the S&P Equal Weight index for the S&P. It’s a way to reduce the concentration in mega-cap stocks,” he said.

Volatility

Nuttall mentioned another characteristic of the Nasdaq-100 Technology Sector index.

“Because you’re getting pure tech exposure, the Nasdaq Tech is more volatile than the Nasdaq-100,” he said.

“The Nasdaq-100 only has 60% in tech. People tend to forget that.”

The implied volatility of the Nasdaq-100 Technology Sector index is about 21% versus 16% for the Nasdaq-100.

Catapult

Reflecting on the structure of the notes, Nuttall said that the terms were “reasonable” but that the structure itself may be challenging for asset allocators.

“These notes are called catapults. You get two positive outcomes. You either get called in a year or you get the uncapped leveraged upside at maturity,” he said.

“It’s not a bad note. The 65% barrier is pretty good. But the index was up 58% last year. That’s what’s scary. It could go down a lot.”

Since only one of the two outcomes may unfold, investors had to think strategically, he said.

“It’s a little bit of a timing play. You almost have two separate trades. If we have a pullback this year, you don’t get called, you move into a growth play and that’s great. If we don’t have a pullback, you get called at 13% in one year and that’s OK,” he said.

“The problem with these notes is that you don’t know. Is it growth? Is it income? Is it short or is it long?

“I don’t think I would do it because I would want to play the growth strategy, in which case, 13% would not be enough for this asset class. I’d rather have a two-year leveraged note and see what kind of upside I can get.”

Tempting play

Steven Foldes, founder, and wealth manager at Evensky & Katz / Foldes Financial Wealth Management, was intrigued by the payout.

“Some of the big tech stocks like Apple and Tesla are down this year. If you think tech is not going to fly forever, you could lock in 13% and look at it as an income play. 13% is a nice coupon,” he said.

“Of course, it would be nice to hold the notes for two years. You get a big barrier and the 1.25x leverage with no cap.”

Hard to tell

But getting the participation at maturity was not a guarantee.

“If we want to be involved in tech, we want to fully participate. If you get called at 13%, you could miss out on what has been a volatile but very successful trade,” he said.

The Nasdaq-100 Technology Sector index was up three years in a row in 2019 (+50.3%), 2020 (+43.9%) and 2021 (34.5%). The index dropped 28.2% in 2022 before soaring 57.8% last year. It was flat in 2018.

Risk of missing out

“If you believe that tech may not have a great year after this 60% return last year, if you think the sector may be flat or modestly up, then you get a really nice 13% return after one year,” he said.

“But you give up the potential for a very high return.”

Some investors may be satisfied with the call premium.

“If I was a conservative investor, I would like it. I wouldn’t be sorry about missing out on the upside,” he said.

But more aggressive investors would be reluctant to cap their potential gain at 13%.

“It’s a very interesting note. But I am very ambivalent about it.

“I would have to do more research before fully embracing it or discarding it,” he said.

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes settled on Feb. 21.

The Cusip number is 48134WDG9.

The fee is 1.75%.

© 2015 Prospect News.
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