Buffered notes, booster-plus notes and reverse convertibles with a worst-of feature are generating interest in a US market dominated by the reverse convertible, according to distributors JVB Structured Products Group and BlueBell Private Wealth Management.
Major players Deutsche Bank, JPMorgan, Lehman Brothers, Merrill Lynch and Morgan Stanley have all launched buffered return-enhanced notes in recent weeks, with varying participation rates and caps, noted JVB Structured Products Group senior vice president Steve Peters.
For example, JPMorgan recently opened Buffered Return Enhanced Notes linked to an equally-weighted basket of three global indices and paying 140% of the rise in the basket, uncapped, with 10% downside protection.
This payoff is typical of the buffered, return-enhanced note (protected enhanced tracker), which typically offers a protection barrier before reverting to a tracker on the downside, and participation that might extend as far as 150%, with or without a cap, on the upside.
Buffered enhanced return notes based on the performance of the S&P 500 have been particularly popular with clients, said Blue Bell Private Wealth Management co-founder and CIO Scott Miller. The Philadelphia-based structured products expert said he likes to ‘ladder’ structured products into his clients’ portfolios, and recently put clients into 15-month notes with an 18% upside potential and a 10% downside buffer. “To me, for the downside protection you are garnering, it is well worth it,” he told SRP.
Booster-plus notes (a digital with an uncapped call in payoff terms), on the other hand, offer principal protection and a bonus return if the underlying’s value increases. These products typically pay a preset coupon if the performance neither falls nor exceeds the coupon level, and the coupon plus the outperformance should it exceed that level. Otherwise it repays capital.
Royal Bank of Canada recently issued the five-year Principal Protected Booster Note linked to a basket of commodities that includes copper, nickel, zinc and crude oil, for example.
Reverse convertibles that apply a worst-of payoff (reverse convertible with a worst-of option) to a theme such as the Dogs of the Dow are also fairly popular, said Peters. These Dogs of the Dow products, which track the performance of the ten Dow Jones Industrial Average stocks with the highest dividend yield, have performed consistently well, he added.
For example, JPMorgan Chase’s one-year 29.50% Reverse Exchangeable Notes pays a coupon of 29.50% pa monthly throughout the investment, and repays capital if the final level of the worst-performing share is greater than its initial level and no share has breached a 30% downside barrier. However, if the final level of the worst-performing share is lower than its initial level and any share has fallen by more than 30% at any time during the investment, the product loses capital on a one-for-one basis in line with the fall in the worst-performing share, paid in either shares or cash.
These products are available now on the US database.
