I have recently come across a few highly leveraged structured note offerings. One such note that caught my eye was a 5 year note offering 5x the upside performance of the popular Euro Stoxx 50 Index ("Euro Stoxx 50 (SX5U)"), up to a cap of 94%. The structured note offered no principal protection and exposed the investor to 1x downside exposure.
Why are we interested?
Leverage is a dirty word in securities investing, with good reason - margin investing is a risky enterprise unsuitable for most retail investors due to margin call potential, whereas leveraged ETFs provide the twin dangers of value decay due to daily compounding and leveraged downside.
In contrast, one of the benefits of structured investing is that leverage can be responsibly employed without the typical dangers. For starters, there are no margin calls to worry about.
In addition, structured note leverage is not compounded daily, as leveraged ETFs are, but rather operates from inception to maturity. That means if the underlying index increases 10% over the 5 years to maturity, the issuer is obligated to pay out a 50% return (10% * 5x). Thus, there is no decay concern as is typically found in leveraged ETFs.
Furthermore, there is no leveraged downside in this particular investment - whereas it offers 5x upside, there is only 1x downside - not a bad tradeoff!
Let's do some technical analysis on this offering:
To recap, the characteristics of the note are as follows:
· 5 year term
· 5x upside to a cap of 94%
· 1x downside
As discussed in a previous post, investors in a structured note will not receive the dividend associated with the underlying index (although the missing dividend is accounted for in terms of reduced option pricing - i.e., better investment terms).
Since Euro
