Scotia’s $1 million dual directional digital notes on SPDR ETF aimed at mild bulls, bears

By Emma Trincal

New York, Feb. 27 – Bank of Nova Scotia’s $1 million buffer digital notes due Feb. 26, 2026 linked to the performance of the SPDR S&P 500 ETF Trust offer dual directional returns with asymmetrical caps and distinct payouts which may fit the views of bears and moderately bullish investors alike.

If the ETF finishes at or above its initial level, the payout at maturity will be par plus 12.97%, according to a 424B2 filing with the Securities and Exchange Commission.

If the ETF falls by no more than 25%, the payout will be par plus the absolute value of the ETF’s return.

Otherwise, investors will lose 1.3333% for every 1% that the ETF declines beyond 25%, payable as a number of shares per note equal to $10,000 divided by the ETF’s 75% buffer value.

New high

Despite what seemed like a modest return on the upside, a trader said the notes were relatively well-priced given current market conditions.

“We just punched another record high on Friday,” he said.

He looked at the last two-year price action of the SPDR S&P 500 ETF Trust (Ticker: “SPY”).

The fund hit a high in December 2021 at approximately $477 a share. On October 2022, the ETF fell 23% off that peak to $366. A technology-driven rally ensued pushing the share price to a fresh all-time high on Friday at $510.

“That’s a 40% jump from the lows of October 2022,” he said.

This trader said the rally should continue for another two years but probably not at the same pace.

“On the upside, the note gives you 13%. As long as it doesn’t go down, you get that,” he said.

He analyzed the value of having a “booster” or digital payout, which does not require any growth.

“What kind of upside am I getting? Well, it doesn’t look like much but it’s actually not bad,” he said.

Bullish forecast

“You have to look at a very unusual rate outlook during those two years and going into an Election year. Even if the Fed starts cutting rates in March or June, which is questionable, you may not have the fast rally we just had over the last 16 months,” he said.

This trader pointed to some “aggressive” forecasts on Wall Street calling for the S&P 500 index to rise above 5,800, the equivalent of a $580 target price for the ETF.

On the strike date, the underlying closed at $502. A rise in the index to the analysts’ price target would represent an increase of approximately 15%, he noted.

“These are rate cuts forecasts. They’re aggressive calls. By getting 13% automatically if SPY is flat or up, you’re only giving up 1.5%. I don’t think you’re giving up much on the upside,” he said.

Geopolitical risk

He then examined the downside payout.

“We are likely to get increased tensions in the world – we already have Gaza, Russia ... now there’s North Korea delivering weapons to Russia... We could have a lot of reasons for the market to go down,” he said.

“But with a 25% buffer, you’re getting a lot of downside protection. And inside that buffer, you outperform SPY.”

Recovery play

“My only issue with these notes is the duration. You’re really making a two-year bet,” he said.

But the nature of the potential triggers behind a market downturn gave him confidence.

“If the market drops due to geopolitical crises, we know it usually doesn’t last too long. I don’t expect a Great Depression, not even another financial crisis with all the protections we put in place in 2008,” he said.

This trader said he anticipated a market decline followed by a rebound during the two-year term.

“We could finish flat or slightly positive. In that case, getting 13% is attractive.

“I think it’s a pretty good note,” he said. “I wouldn’t bet the farm on it, but I may put between 10% and 15% of my portfolio in it.”

Hedge only

Jonathan Tiemann, president of Tiemann Investment Advisors, said he would not consider the notes.

“It’s bearish. You’re capped at 13% on the upside. For a two-year, that’s not particularly rewarding,” he said.

The absolute return was what really added value to the note.

“You get paid on the downside twice as much. It’s one-to-one, and not a digital. But your cap is 25% versus 13%.”

The comparison between the two maximum returns was one of the reasons he considered the payout to be bearish.

“25% is a strong buffer even with the gearing. And you can outperform significantly with the absolute return,” he said.

But Tiemann said that he would not have any interest in the notes.

“You can look at this as a hedge. And it’s fine. But I’m a long-term investor and hedging out my positions is not my game,” he said.

He explained why.

“Part of being a long-term investor is to participate in the growth of the economy. If you hedge that, you lose the opportunity to participate in that growth.

“Yes, there is always the possibility of losses. But that’s also one of the reasons long-term investing can be so rewarding,” he said.

Tiemann conceded that the payout of the note was not entirely bearish.

“You get a little bit of something on the upside. I suppose volatility is low and options are cheap.

“But it’s really a play on the downside. There’s definitely a bearish bias in this note,” he said.

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

The notes struck on Feb. 21 and settled on Monday.

The Cusip number is 06417YN39.

The fee is 1.5%.

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