GS Finance’s index-linked notes on S&P, Dow, Nasdaq with absolute return offer defensive play

By Emma Trincal

New York, Dec. 14 – GS Finance Corp.’s 0% index-linked notes due Dec. 18, 2025 tied to the least performing of the S&P 500 index, the Dow Jones industrial average and the Nasdaq-100 index offer a deep barrier with absolute return, two features likely to appeal to investors seeking more protection over the next five years, advisers said.

The payout at maturity will be par plus the gain of the least performing index return if each index finishes at or above its initial level. If any index falls but not below 60% of its initial level, the payout will be par of $10 plus the absolute value of the least performing index return. Otherwise, investors will lose 1% for every 1% that the least performing index declines.

Worst-of, tenor

Jerrod Dawson, director of investment research at Quest Capital Management, liked the terms even though, in his view, managing risk is always more challenging with a worst-of than it is with a note tied to a single asset.

“It always gets tricky when you’re investing in a worst-of,” he said.

“I tend to look at this as a Nasdaq note because you’re exposed to the worst-of and the Nasdaq is the most volatile of the three,” he said.

“You have more ups and downs. If the market is down, the Nasdaq is likely to drop the most.”

But he viewed the five-year tenor as an advantage.

“The longer timeframe gives this issue a lot of credibility. If we have a meaningful pullback, there should be enough time for a recovery,” he said.

Dawson said a correction in the near term is likely.

“So, this gives you a pretty reasonable long-term positioning,” he said.

Trade-off

The absolute return and low barrier had to be paid somehow, he said.

As the worst-of constituted one source of additional premium, the dividends over the five-year period also helped pricing, he noted.

“You’re not getting paid the dividends. But that’s what helps pay for the downside protection, so I think this is a trade-off that makes sense,” he said.

The Dow Jones industrial average is the highest-yielding index of the three with a dividend yield of 1.98%.

The S&P 500 index yields 1.56% and the Nasdaq, 0.5%.

Hedge

The absolute return may be earned over a wide band, allowing investors to gain up to 40% from a dramatic price decline. It made the product well-suited for investors focused on maximizing capital preservation.

“It works well as a complement of a long-only equities position,” he said.

“If the worst-of is down 15%, you’re up 15%.

“It’s a natural hedge,” he said.

Another plus was the fact that Goldman is “a pretty solid issuer,” he added.

“I think it’s an interesting little note in this market as we touched record highs.”

Adjusted to the environment

Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, also liked the notes.

“It does seem interesting to me,” he said.

“You’re basically getting market returns on the worst-of.

“The downside with that 60% barrier is pretty much covered and you may even get a positive return.

“It seems reasonably attractive considering the environment we’re in.”

Not for bulls

The structure was not perfect, but the benefits outweighed the more negative aspects of the structure.

“Five years is a little bit long,” he said.

“You’re missing out on the dividend over that length of time and that’s the downside.

“Another downside is you’re getting the return of the worst-of. I’m not a fan of worst-of.”

The notes for instance would not be a good solution for tech bulls, he noted.

But the 40% contingent protection on the downside was worth considering for some investors.

“If the market goes down, you’ll be protected...you’ll even benefit from it,” he noted.

“It seems like a reasonable play if you look at things defensively.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the agent.

The notes priced on Dec. 14 and will settle on Dec. 17.

The Cusip number is 40057EUD7.

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