HSBC plans first-time structured note to be tied to NYSE FANG+ index

By Emma Trincal

New York, Aug. 23 – HSBC USA Inc. plans to price 0% buffered market participation securities due Dec. 18, 2019 tied to the NYSE FANG+ index, a move that marks the first time this index is used in a registered structured note, according to data compiled by Prospect News.

The payout at maturity will be par plus any index gain, up to a maximum return of at least 15.5%, according to an FWP filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 10% and will lose 1% for each 1% decline beyond 10%.

“It’s an interesting way to play this sector,” a market participant said.

FANG+

The NYSE FANG+ index tracks a segment of the technology and consumer discretionary sectors consisting of highly traded growth stocks of technology and tech-enabled companies. The index currently has 10 constituents including Facebook, Inc., Amazon.com, Inc., Netflix, Inc. and Alphabet Inc.’s Google, the famously coined “FANG” stocks. The other five components are Apple Inc., Alibaba Group Holding Ltd., Baidu, Inc., Nvidia Corp., Tesla, Inc. and Twitter, Inc.

“We see so many deals on one or two, sometimes three FANG stocks,” said an industry source.

“But they’re typically worst-of.

“At least here you get them all in one note tied to one asset...That’s not a worst-of. That could be part of the appeal.”

Imperfect alternatives

So far investors have been able to gain access to the NYSE FANG+ index via exchange-traded notes launched in January by Rex Shares LLC and issued by Bank of Montreal under the brand “REX MicroSectors.”

But those have been solely designed for short and leveraged plays.

There is no direct, delta-one access to the NYSE FANG+ index other than via futures trading on the Intercontinental Exchange, or “ICE.”

ICE has announced that it will launch listed options contracts on the index but has not done so yet.

Finally, AdvisorShares Investments has launched an exchange-traded fund listed on the NYSE Arca under the symbol “FNG.” But the ETF is actively managed using a quantitative strategy seeking high correlation with the “FANG” stocks without directly tracking the NYSE FANG+ index.

Index vs. basket

The use of the NYSE FANG+ index was seen as an alternative to a basket.

“You may get better terms doing it on the index rather than having to put together an equally weighted basket,” the industry source said.

That is not to say that structuring a note on a basket comprised of the 10 index components would be difficult.

“Those stocks are fairly liquid. To be able to do this on a basket shouldn’t be a challenge for any derivatives desk,” the market participant opined.

“But it’s probably easier for them to do it on an index. All you need to reference is just one price.”

An investment, not a trade

It may also be more compelling for investors, this market participant noted.

“People like to have one index. Even if it’s only 10 names, they feel less concerned about company risk... you know... acquisitions, mergers, negative headlines...disappointing earnings...that sort of thing. Facebook is a good example...”

A fund portfolio manager said the notes are for investors, not traders, unlike the REX MicroSectors ETNs.

“This is more of an investment for people who want to be long the index. It’s a very different approach than getting in and out of a leveraged or short position,” he said.

“Whatever people want to do, as long as they know the risk they should be able to invest. If someone wants to go long with a buffer, that’s one way to do it.”

Missing leverage

But some found the structured note disappointing.

“I don’t know. Usually when you have a cap, you have some kind of leverage on the upside, usually 1.5 times or 2 times and you often have the buffer too. Here there is no leverage but you’re capped,” the market participant said.

“Sure there’s a buffer. That’s the value of the product. One could argue that you can outperform on the downside.

“But I find the note too defensive. I’d rather see something more bullish. Give me more leverage or a higher cap. I would be willing to take a lower buffer.”

High-flyers

He based his view on the performance of the underlying index.

Based on back-tested performance data, the combination of stocks in the NYSE FANG+ index have returned a 33.5% annualized total return from Sept. 19, 2014 to June 6, 2018, as compared to 17.7% for the Nasdaq-100, 11.3% for the S&P 500 and 20.6% for the S&P 500 Information Technology index, according to ICE’s website.

Recent heavy losses incurred by Tesla and Facebook could even provide some safety giving the trade a lower entry level. A bullish investor would consider this a buying signal with potential more upside.

“I think you’re likely to be capped out at 15.5% pretty fast. I’d rather see something more aggressive,” he said.

Trend and size

Will there be more issuers readying structured notes on the NYSE FANG+ index?

“It depends,” said the market participant.

“It hasn’t priced yet, so it’s hard to tell. But my guess is that if you get big wirehouses to do it, firms like Merrill Lynch, they’ll get people to buy it in large volume trades.

“I think it may be more challenging for a smaller firm. We’ll see. It all depends on how well HSBC is able to market the product.”

HSBC Securities (USA) Inc. is the underwriter.

The notes will price on Sept. 13.

The Cusip number is 40435FX77.

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