Are NERTIs the right investment for you?

NAB Equity Referenced Term Investments or “NERTIs” are short term equity referenced investments issued by NAB. NERTIs may be suitable for wholesale investors who have a view on equities and are looking for enhanced income returns. This article will focus on how they work, potential risks and benefits.

How they work

NERTIs provide investors with the potential to generate an enhanced income return by referencing an investment to an underlying equity. The enhanced income return, referred to as the Income Rate, is received in return for taking the risk that you may be delivered shares in your chosen equity at a value which is less than your original investment amount.

NERTIs give you the flexibility to customise the risk and return of your investment. You select:

1. The Australian equity you would like to reference (reference security)
2. The term between 1 month and 364 days
3. Reference price or yield of your choice

NERTI’s are available on ASX200 stocks as well as the index itself. The minimum investment per security is $50,000.

What influences your return? 

• Where you set the reference price, relative to the current price of the equity will determine your income rate. A higher reference rate will result in a higher income rate, but it also increases the possibility you may be required to purchase your nominated stock for more than its listed price.
• The repayment of your original investment amount is determined by the price of your chosen equity at maturity, regardless of any fluctuations over the term of the NERTI.

To discuss the type of returns you can get through NERTIs, please contact your NAB Investment Specialist.

On maturity of the NERTI there are two possible outcomes:

1. The price of the nominated security is greater than the reference price – You will receive your original investment back plus interest payments.
2. The price of the referenced security is less than or equal to your reference price – NAB will deliver shares at your reference level. The shares will have a value less than or equal to your original investment amount. Investors also have the option to cash settle if they do not want to receive the security.

Understanding the key risks and considerations

A key risk is you buy the reference security at your chosen reference price. However, in a market sell- off, this could be higher than the market value at the time the NERTI matures. In this instance, you may choose to hold the stock, if you are of the view that that the stock value has the potential to move higher in the future.  In this case, you will receive any dividends paid as a normal equity holder while you continue to hold the shares.

Investors should be aware that once a trade is entered, it is unbreakable for the nominated term.

During the term of the NERTI, you will not receive any dividends generated by the referenced security and returns are capped at the coupon rate.

Conclusion:

A NERTI gives you the flexibility to customise the risk return characteristics of your investment. Setting your Reference Price higher, relative to the current price of the Reference Security, will generally provide you with a higher Income Rate but also comes with a greater risk of you being delivered shares in your chosen equity at maturity on circumstances where the shares are trading at a price less than what you paid for them. The benefit of NERTIs is that it allows you to generate profit whether the market moves up, stays flat or even falls as long as the stock doesn’t fall below your nominated reference level. The key is to choose a stock you are happy to hold even if it closes below your reference level at maturity.

For a full discussion of the risks and benefits of NERTIs, please contact your NAB Investment Specialist.

Important Information

The information contained in this article is gathered from multiple sources believed to be reliable as of the end of October 2023 and is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, we recommend that you consider whether it is appropriate for your circumstances and that you seek independent legal, financial and taxation advice before acting on any of this information. ©2023 NAB Private Wealth is a division of National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.