Goldman links to new Core 8 index; Merrill ties to natural gas; products offer easy access, advisor says

By Kenneth Lim

Boston, May 21 - A couple of new products by Goldman Sachs Group, Inc. and Merrill Lynch & Co., Inc. give investors ways to gain exposure to relatively inaccessible sectors, an investment advisor said.

Goldman Sachs' notes linked to the new Core 8 index offer exposure to emerging markets, while Merrill's leveraged notes linked to natural gas tap into a hot sector, the advisor said.

Goldman ties to Core 8 index

Goldman Sachs plans to price a series of 22- to 26-month notes linked to the newly created Core 8 index.

The notes will track the index, and the payout at maturity will be par of $1,000 plus the index return.

The Core 8 index, which was created in April, reflects the U.S. dollar price changes of a weighted index of 65 stocks of companies in eight emerging countries. The 65 stocks comprise the top 10 from each of Indonesia, Mexico, the Philippines, South Korea and Turkey and the top five from each of Egypt, Pakistan and Vietnam. The weightings of each index stock will be rebalanced quarterly, subject to a 30% weighting cap per country and a 5% weighting cap per index stock.

Goldman structure 'straightforward'

The Goldman notes are a straightforward tracker, the advisor said.

"This is the classic index-tracking product," the advisor said. "No extra bells and whistles, a one-for-one payout whether it's up or down. You can do this with indexes instead of individual stocks because with indexes the chances of the underlying going to zero is very slim, so you don't really need any significant kind of capital protection."

The index structure could take away some of the volatility that is usually associated with investing in emerging markets, the advisor said.

"Usually when you invest in emerging markets there's more risk involved, but packaging the investment in an index, and it's an index of the top stocks in each market, probably takes away some of that risk," the advisor said.

The product offers investors an easy way to get emerging market exposure, the advisor said.

"Investing in emerging market stocks is always a tricky thing," the advisor said. "If you want to do it yourself there's a whole lot of infrastructure you need to have in place, and if you want to invest in eight different markets that's eight times the trouble. I'd say the concept of having an index that picks the best of those markets is interesting."

But the advisor said the product was not as generous as it could potentially be.

"The bottom line is that an emerging-market investment is still an emerging-market investment," the advisor said. "I think maybe some leveraged upside would make this significantly more attractive, especially since the payout is one-for-one on the downside. There's really no extra incentive for buying this product other than to gain exposure to this new index, because if I want to get emerging market exposure I imagine there would be reasonably attractive alternatives available to me."

Merrill links to natural gas

Merrill Lynch also launched a series of notes due October 2010 linked to the value of natural gas.

At maturity, if the value of natural gas as measured by New York natural gas futures contracts scheduled for delivery in October 2010 is greater than its starting value, the notes will pay par of $10 plus 3 times the percentage increase in the contract value. The total payout will be capped at 145% to 155% of the principal, with the cap to be decided at pricing.

If the contract value is flat or at least 85% of its initial value, the payout will be par. Investors will lose 1% of their principal for every 1% that the contract value declines by more than 15%.

Natural gas a hot sector

The Merrill notes appear to tap current bullish sentiments in the price of oil and natural gas, the advisor said.

"We're living in a period of record oil and gas prices, and there are a lot of people who think the prices aren't going to come down anytime soon," the advisor said. "It's a very bullish sector right now, and this product is obviously responding to that."

"A lot of investors want to get a piece of this sector right now," the advisor said. "It's a way to take part in a very hot sector and to potentially hedge against inflation. Most people don't have the means to trade in gas futures directly, so this is a way to get access to that."

The notes have an attractive upside-downside exposure structure, the advisor said.

"The structure itself is not too bad," the advisor said. "You'll do better than the underlying as long as the price of natural gas doesn't go up by more than 50% at the midpoint, and on the downside actually you always outperform natural gas because you only lose after prices have gone down by more than 15%."

But the advisor said investors in the notes could also risk underperforming oil prices.

"If oil goes up by more than 50%, you'll be beating yourself because you can't take part beyond the cap," the advisor said. "And with the way prices have been shooting up, that's actually not a ridiculous scenario. So you need to be aware of that risk."

A shorter-term product might be more attractive, the advisor said.

"I can do a few things if it's shorter," the advisor said. "One, I can adjust my view let's say in a year's time. So it's obviously less risky that way. The second thing is there's the possibility of reinvestment, so I'm less exposed to the risk of underperformance because of the cap."

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