Halo and Equity Armor breakdown why structured notes can be a good way to investment in the semiconductor sector
Investment Opportunity
The push to make ever more products “smart”—whereby the product can collect data and think for itself—has been a key contributor to global microchip supply chain shortages. Industries from gaming to car manufacturing have been stung by this shortage.
The CHIPS and Science Act of 2022 speaks to the importance of a strong industrial strategy to revitalize domestic manufacturing, create good-paying American jobs, strengthen American supply chains, and accelerate the industries of the future.
The Wall Street Journal recently took things to a new level, questioning if the CHIPS Act is now industrial social policy. This speaks to just how integral microchips are to modern living.
Chips may be the future, but not all chips are created equal.
Solution: Chip-linked structured notes
Accessing the chip craze the right way. In response to growing demand for microchips, several thematic ETFs have recently been issued. As an investment strategy, these funds present an interesting low-cost vehicle. But the naïve, perhaps lazy, approach to ETF assembly—whereby every chip stock is thrown into a bag, regardless of investment merit—can present some unintended consequences. Notably, underperformance.
For example, Exhibit 1 highlights the significant difference in performance between SMH (a popular ETF) and NVDA and AMD—both household names with proven R&D capabilities and durable business models.
Companies linked to microchips and semiconductors have generally seen a run up in prices and a pullback is a real possibility.
If equities are too expensive now, one alternative is an equity-linked structured note with chips as the underlier. This could enable investors to capture upside potential—which we argue is still material, albeit muted compared to several years ago—while allowing for the possibility of softening demand as supply chains normalize.
Exhibit 1: Trees don’t grow to the sky
Selecting the “right” way to access an investment theme matters.
Advanced Micro Devices Inc (AMD)
NVIDIA Corp (NVDA)
VanEck Semiconductor ETF (SMH)
Equity Armor’s Luke Rahbari discusses how investors can tap into Chip names with structured products.
Note Example Ideas
The following structured note ideas are presented for illustrative purposes only. Please reach out to discuss current pricing and customizable note terms.
Equity-Like Returns With a Buffer
Rationale:
Investors looking to profit from a bullish outlook on these stocks, but who are concerned about general market volatility, can potentially implement this note. It carries a fixed annualized yield of 12.68% for two years, which will be paid regardless of market performance. In case there is downside volatility, a 20% hard buffer protects the note from the full spectrum of losses. The end result is a worst-case loss of -100% + (12.68% x 2) + 20% = -54.64%.
For illustrative purposes only. Indicative pricing as of 3/7/2023. Changes to terms and pricing should be expected. The information does not constitute a recommendation from Halo Investing. There is no guarantee that these objectives will be met.
Neutral – An All Weather Staple
Rationale:
Investors seeing the market “fork in the road” may potentially appreciate how an absolute note benefits from both positive and negative market returns. There are three potential scenarios for the note’s return at maturity in two years, applied to the lower performer of the two:
- Better than 0%: 1.01 x multiplier.
- 0% to -40%: Invert the negative return to make it positive.
- Worse than -40%: Same return as the underlier.
The greatest potential outperformance occurs at -40%, which would generate a positive return of 40%, effectively beating the underlying asset by 80% in two years.
For illustrative purposes only. Indicative pricing as of 3/7/2023. Changes to terms and pricing should be expected. The information does not constitute a recommendation from Halo Investing. There is no guarantee that these objectives will be met.
Bullish with Income Along the Way
Rationale:
Investors looking to benefit from these stocks rising can do so with an income stream, similar to selling put options. This note pays a 24% annualized yield, contingent upon these two stocks being above a -25% return on coupon payment dates. Also, these coupons have a “memory” feature. That means missed coupons are accrued and paid if the underlying asset recovers from being under the -25% threshold. Assuming the bullish market outlook is correct and the stocks are above -25% at maturity, an investor would generate a 72% total return over 3 years.
For illustrative purposes only. Indicative pricing as of 3/7/2023. Changes to terms and pricing should be expected. The information does not constitute a recommendation from Halo Investing. There is no guarantee that these objectives will be met.
Bullish Growth Seeking Upside
Rationale:
Bullish investors expecting significant upside may want to multiply those gains, similar to buying call options. This growth note pays 1.59 x the price return of the lesser performer in four years.
A hypothetical example at maturity:
NVDA: +100%
AMD: +75%
Growth Note: +75% x 1.59 = +119.25%
For illustrative purposes only. Indicative pricing as of 3/7/2023. Changes to terms and pricing should be expected. The information does not constitute a recommendation from Halo Investing. There is no guarantee that these objectives will be met.
The information provided here is neither tax nor legal advice and should not be relied on as such. Investment involves risk including possible loss of principal.
FOR INSTITUTIONAL, FINANCIAL PROFESSIONAL, PROFESSIONAL INVESTORS, AND WHOLESALE INVESTOR USE ONLY. This communication should not be distributed, in its current form, to end-investors, and it is for investment professionals only.
The material is for information purposes only. It is not intended for and should not be distributed to, or relied upon by, members of the public.
It is not intended to be a forecast, research or investment advice, and is not a recommendation, or an offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are subject to change. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be and should not be interpreted as recommendations. Reliance upon information in this material is at the sole risk and discretion of the reader. The material was prepared without regard to specific objectives, financial situation or needs of any investor.
Past performance is not a reliable indicator of current or future results.
