Barclays’ buffered SuperTrack notes on iShares MSCI EAFE, EM offer bullish, defensive play

By Emma Trincal

New York, Nov. 30 – Barclays Bank plc’s 0% buffered SuperTrack notes due Nov. 30, 2021 linked to the iShares MSCI Emerging Markets exchange-traded fund and the iShares MSCI EAFE ETF give investors a chance to earn a high return while significantly protecting their capital in a down market. Such structure makes the notes attractive for investors who are “defensive and aggressively bullish at the same time,” said Almudena Rojas, structured products analyst at Future Value Consultants.

If each asset finishes at or above its initial level, the payout at maturity will be par plus 1.45 to 1.5 times the gain of the worse performing fund, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if either asset falls by up to 30% and will lose 1% for each 1% decline of the worse performing asset beyond the buffer.

Correlation

“It’s a worst-of with uncapped leveraged return. That’s a very strong bullish profile,” she said.

She pointed to the correlation between the two underlying ETFs, which is 0.88.

“While a worst-of increases your chances of losing money, the fact that those two underlying are so highly correlated limits part of the risk. You know that if one goes up, the other is very likely to go up too,” she said.

Perhaps the most striking aspect of the product was the combination of a very bullish structure with a defensive element provided by the 30% buffer, she noted.

Bulls only

“You absolutely need to be bullish to buy the notes. You must expect that the index will rise over the term. Having no cap and about 1.5 times leverage can generate a very attractive return over a three-year term,” she said.

“At the same time, the same bullish investor is also someone who doesn’t want to undertake a lot of risk.

“The product is built around those two principles – aggressive upside and defensive downside.”

Stress testing

Future Value Consultants offers stress testing on structured notes allowing its clients to determine the probabilities of occurrence of outcomes pertaining to a specific product and structure type.

The Monte Carlo simulation is based on a neutral scenario, which reflects standard pricing based on the risk-free rate, dividends and volatility of the underlying.

The model runs four other market assumptions based on different index growth rates and volatilities. Those are – bullish, bearish, less volatile, more volatile.

“Most clients will use the market assumption that best represents the characteristic of a given type of product and they may compare it with the neutral scenario,” she said.

“In this case the simulation really makes sense in the bullish scenario because the rationale for investors buying the notes is that they expect the market to go up, not to stay in a range.”

Each report contains a total of 29 sections or tests, which encompass simulation tables as well as back-testing analysis.

Rojas chose to focus on one of them called the capital performance tests. The table displays the probabilities of each of the three outcomes – return more than capital, return exactly capital, return less than capital. She picked a leverage factor of 1.475 at the midpoint of the range for her report.

Losses, gains

In the bullish scenario, investors have a 63.28% chance of getting “more than capital.” The 25.68% probability of the index finishing within the buffer zone, which delivers “exactly capital” at maturity is substantial, she noted. In comparison, the chances of getting a “return less than capital” is limited to 11.04%.

“This distribution illustrates the good job performed by the buffer as it reduces the chances of losing money to 11%, which is quite low,” she said.

“On the other hand, one of the more subtle risks here would be the opportunity cost. You may end up 25% of the time getting nothing more or less than your money back at the end of the three years.”

This outcome has a much higher chance of occurring in the neutral scenario with a 33.25% probability.

“If the market does not move much, if it’s flattish and slightly down you would fall under this opportunity cost situation,” she said.

Average payoffs

The capital performance tests also display average payoffs across the same market scenarios.

There, the “return more than capital” outcome offered a brighter picture.

Investors may expect a 48% gain in the bullish scenario and a 32.3% gain in the neutral environment.

The bear market under this positive outcome would provide an average payoff of 22%, close to that of the less volatile scenario, which is 21%. The more volatile scenario is the second best one after the bull with an average positive return of 41%.

“In terms of payoffs all market scenarios look quite good when you finish with a positive performance,” she said.

It is not necessarily the case when investors lose money.

For instance, the average loss in the bull market is 14.5%.

Buffer power

The amount of the loss reveals how valuable the buffer is, she noted.

“If you are going to lose some of your capital, it’s because the market fell by more than 30%. This means you’re already in a severe bear market where further declines are not unusual,” she said.

But again, the probabilities for the most negative scenario are slim. The back-testing analysis over the last five years also show a low frequency for the loss outcome as it has happened only 2.7% of the time.

“This product could be used as an alternative to the ETFs. It provides a pretty good upside potential and gives you a protection on the downside you would not have if you had purchased the ETF shares.”

Barclays is the agent.

The notes will settle on Wednesday.

The Cusip number is 06746XX57.

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