Morgan Stanley Issues 3-Year Structured Notes with 8% Contingent Coupon Linked to Mining ETFs

Structure and Underlying ETFs Performance

The notes are linked to the State Street SPDR S&P Metals & Mining ETF (XME) and the VanEck Gold Miners ETF (GDX). Performance is measured against the worst-performing ETF, meaning a decline in either fund negatively impacts returns regardless of the other’s performance. This eliminates diversification benefits, exposing investors to downside risk from the weaker fund. Both the strike and pricing dates are July 29, 2026, with the issue date on July 31, 2026. The final observation date is June 29, 2029, subject to adjustments for non-trading days and market disruptions as specified in the documentation.

Investors do not participate in any appreciation of either ETF. Maximum returns come solely from contingent coupons and principal repayment at maturity or early redemption. This limits upside potential while exposing investors fully to downside risk beyond the principal-at-risk threshold. The pricing supplement does not disclose initial ETF levels, call thresholds, or buffer levels numerically.

Contingent Coupon Payments and Memory Feature

The notes pay an 8.00% annual contingent coupon on coupon payment dates only if both ETFs close at or above their coupon barrier levels on observation dates. If either ETF closes below its coupon barrier, no coupon is paid for that period. Investors risk receiving no coupons over the full three-year term if market conditions are unfavorable. The notes include a memory feature, allowing unpaid coupons to accumulate and be paid later if both ETFs subsequently meet or exceed coupon barriers on future observation dates.

The 8% annual coupon rate offers a potentially above-market yield compared to similar fixed-income instruments, incentivizing investors to accept the risk of zero coupon payments during adverse periods. However, this rate applies only when both ETFs meet barrier conditions, which may not occur consistently given the volatility of mining and precious metals equities.

Automatic Early Redemption and Redemption Schedule

Automatic early redemption is triggered if both ETFs close at or above their call threshold levels (100% of initial levels) on any redemption determination date. The first such date is January 29, 2027, with subsequent monthly dates through May 29, 2029. If triggered, securities are redeemed at principal plus accrued contingent coupons, including any previously unpaid amounts.

Early redemption benefits the issuer by allowing Morgan Stanley to cease payments if both ETFs appreciate. Investors benefit only if contingent coupons have been earned. Redemption dates may be postponed due to non-trading days or market disruptions. Once redeemed, no further payments occur, capping total returns and eliminating participation in further ETF gains.

Principal-at-Risk Buffer and Downside Exposure

At maturity on July 3, 2029, if not previously redeemed, investors receive principal plus earned coupons if both ETFs close at or above buffer levels. If either ETF closes below its buffer level, investors incur losses proportional to the decline of the worst-performing ETF beyond the buffer. For each 1% drop beyond the buffer, investors lose 1% of principal, potentially resulting in substantial principal loss. Specific buffer percentages are not disclosed in the pricing supplement.

The buffer offers limited downside protection, absorbing losses up to a defined threshold. Beyond that, losses accrue one-to-one with further declines. Investors purchasing at $1,000 must be prepared for the possibility of significant principal reduction if either ETF sharply declines during the three-year term.

Credit Risk and Morgan Stanley Guarantee

The notes are unsecured obligations of Morgan Stanley Finance LLC, not secured by the underlying ETFs. Morgan Stanley provides a full unconditional guarantee, making it liable if MSFL defaults. Investors bear Morgan Stanley’s credit risk; a default could result in partial or total loss. The guarantee extends liability to Morgan Stanley’s balance sheet but does not eliminate credit risk.

These securities are not bank deposits, are uninsured by the FDIC or any government agency, and are not bank obligations. Although Morgan Stanley is a well-capitalized institution, investors should evaluate its creditworthiness carefully, as investment value depends entirely on the guarantee’s enforceability and Morgan Stanley’s financial health.

Valuation and Pricing Details

Priced at $1,000 per note with stated principal of $1,000, the estimated value on July 29, 2026, was approximately $950.80, within $35 of that estimate. The $49.20 difference between issue price and estimated value reflects embedded option costs, issuer credit spread, and distribution expenses. Commissions, fees, and proceeds to the issuer were not disclosed in the pricing supplement and are determined at pricing.

This pricing structure is typical for structured notes, where initial economic value is below principal due to embedded features and costs. Dealers and advisors receive fixed sales commissions from Morgan Stanley & Co., though amounts were not disclosed. Investors rely on coupon payments and principal recovery for positive returns, as initial purchase value is less than principal.

Mining Sector ETF Exposure and Concentration Risk

The underlying ETFs focus on the metals and mining sector, creating significant industry concentration risk. XME tracks U.S.-listed metals and mining companies, while GDX targets gold miners. This sector is cyclical and sensitive to commodity prices, macroeconomic conditions, currency fluctuations, geopolitical events, and monetary policy changes affecting precious metals demand. Market downturns impacting mining could reduce coupon payments and increase principal loss risk.

Because performance is based on the worst-performing ETF, a significant decline in either fund determines investor outcomes regardless of the other’s performance. Mining equities historically experience extended periods of volatility and weakness. Investors should understand sector dynamics and accept the inherent volatility before investing.

Redemption Dates and Investment Duration

The notes have 28 redemption determination dates from January 29, 2027, through May 29, 2029, each paired with an early redemption payment date. The final maturity date is July 3, 2029. Early redemption may occur if both ETFs reach call thresholds, but investors cannot control timing. If early redemption conditions are unmet, the notes mature with payment dependent on ETF buffer levels.

The three-year term is longer than typical short-term fixed income, with returns and principal at risk tied to mining ETF performance. Secondary market liquidity may be limited. Redemption timing could range from early 2027 to maturity in 2029, depending on ETF performance.

Risk Disclosure and Suitability

Morgan Stanley states these securities suit investors willing to risk principal and potential coupon loss in exchange for buffer protection and above-market coupon potential. The principal-at-risk structure means significant loss is possible based on ETF performance. The worst-performing ETF determines outcomes, concentrating downside risk with no diversification benefit.

These notes are unsuitable for conservative investors, those seeking steady income, or capital preservation. They are complex derivatives dependent on multiple factors, many undisclosed numerically, including initial ETF levels, coupon barriers, call thresholds, and buffers. Prospective investors should review all product supplements and prospectuses carefully. The investment involves risks beyond ordinary debt securities, and investors must weigh whether the 8% conditional coupon justifies the risks and complexity involved.