ETFs dominate underlyings in latest SEC registrations

Exchange-traded funds form the basis of a raft of structured products registered with the US regulator in the week ending June 8

Structured products linked to ETFs

Structured products based on exchange-traded funds (ETFs) feature prominently in the latest registrations with the US Securities and Exchange Commission (SEC), with the majority coming from Royal Bank of Canada (RBC) and Bank of Montreal.

Structures linked to ETFs cover the full spectrum, from leveraged returns, straddles, digitals and reverse convertibles through to autocallables.

Leveraged return notes were the main choice for RBC, which issued products of this type tied to the iShares MSCI EAFE Index Fund, the iShares Russell 2000 Index Fund and the iShares MSCI Emerging Markets Index Fund. The highest-paying structure is the 1.99-year note linked to the iShares MSCI EAFE Index Fund, which offers accelerated returns of 1.75 times the growth in the fund with an upside cap of 122–126% and a 90% downside buffer.

Royal Bank of Canada's 1.24-year investment linked to the iShares Russell 2000 Index Fund offers slightly lower returns of 1.5 times the growth in the fund with a cap of 112–116% and a 90% buffer. The bank's 1.5-year iShares MSCI Emerging Markets Index Fund-linked product also offers 1.5 times the growth in the fund but has a higher cap of 118–121% and more generous downside protection of 85%.

The Canadian bank also registered an ETF-based autocallable and a straddle. The 1.99-year autocallable product is linked to the iShares Russell 2000 Index Fund and offers the possibility of a 108–110% payout after 1.1 years, with a 90% downside protection barrier. The straddle has a two-year term and is linked to the iShares MSCI EAFE Index Fund. It has 100% upside participation as well as 100% positive participation in the downside. The downside barrier stands at 63–67.5%.

Of Bank of Montreal's ETF-based products, one is an autocallable, one a leveraged return note and one a reverse convertible. Both the leveraged return structure and the reverse convertible are tied to the iShares Russell 2000 Index Fund. The autocallable is based on the iShares MSCI Emerging Markets Index Fund and has a one-year term. It pays a relatively modest annualised rate of 7.5–9.5% but has a generous 70% downside protection barrier.

Barclays added some diversity to the ETF-linked filings with a digital note tied to the iShares Dow Jones US Real Estate Index. The 1.5-year product offers a fixed return of 12.75–15.25% if the trigger level of 100% of the initial fund level is reached. Principal is lost if the final level of the fund is lower than 80% of the initial strike level.

Wells Fargo and HSBC filed ETF-based structured products with lengthy terms. Wells Fargo opted for a note with a 3.49-year term for its SPDR S&P MidCap 400 ETF-linked leveraged return note, while HSBC's autocallable (linked to the iShares Russell 2000 Index Fund) matures only after five years. It offers a chance to receive 110–113% after one year, though principal is at risk if the final-level barrier of 60% is breached.