GS Finance’s $16.07 million autocallable jump notes on three indexes fit current cycle

By Emma Trincal

New York, June 3 – GS Finance Corp.’s $16.07 million of 0% jump securities with autocallable feature due June 2, 2026 linked to the worst performing of the S&P 500 index, the Russell 2000 index and the Euro Stoxx 50 index may be a suitable play for the end of a bull market, advisers said.

The notes will be called at par of $10 plus an annual premium of 10% if each index closes at or above its initial level on any quarterly call observation date after one year, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus 50% if each index finishes at or above its initial level. If the worst performing index declines by no more than 20%, the payout will be par. If the worst performing index finishes below its 80% downside threshold level, investors will be fully exposed to the decline.

More research

“Five years out...I’m not so much worried about the downside but it’s always good to have a barrier,” said Steve Doucette, financial adviser at Proctor Financial.

“It’s a nice, simplified note. You’re trading your upside for 10% and the protection is there if you need it.

“Each index is pretty diversified, which I kind of like.”

Correlations

Doucette however said he would do more research on the underlying indexes given that investors are exposed to only one of the indexes – the worst-performing of the three.

“I might look to modify one or two indices to see if I can get more coupon,” he said.

“The Nasdaq is a bit more overvalued than the S&P. I would do more research not just on the value of the indices but on their correlations just to see if I may swap some out.”

The coefficients of correlation between the indexes range between 0.83 and 0.86. A coefficient of correlation of 1 indicates a perfect correlation.

One “attractive” feature in the structure is the one-year call protection, he said.

“It’s nice to be able to cumulate the coupon. And the fact that you won’t get called too soon, like after three or six months, makes it even more attractive. If you get called, at least you get your 10%, not 2.5% or 5%.”

Riding the downside

The quarterly call frequency after the first year increases the chances of getting paid.

“We’re likely to have a pullback within the next five years. The question is how much and how long,” he said.

“The market could go down and come back up. We don’t know how much time it would take. But you could probably ride it out within the five years. Market cycles move so quickly.

“What’s neat is that you can cumulate the coupon later if you don’t get called earlier.”

Investors still had to be willing to hold the notes for the entire period, he said.

“As long as the market goes down and comes back up within the term, it doesn’t matter so much when the bear market will hit. You’ll get paid the same rate of return since it’s cumulative.

“You can navigate a downtrend and still get paid.

“That’s what makes the note interesting,” he said.

Core strategy

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said the payout was well suited for today’s market environment.

“It’s important at this stage of the market cycle to have exposure to these indices, but it’s also very important to have some protection on the downside,” he said.

“The three indices are part of a core strategy for an allocation. So, you should be long those indices, but the protection is key just in case something goes against you.

“You have to be prepared since we are at a later stage of this bull cycle.”

Cap

In a bull market, having limited upside may be very unfavorable for investors. But not in today’s cycle, he noted.

“Usually, I don’t like caps. But 10% in respect to the cycle, I think it’s fair,” he said.

“We’ll be in a sideways market for some time with lower returns than we’ve been getting in the past 10, 15 years.

“It’s a big advantage to be able to get a 10% return when you anticipate lower return over the next few years.

“This is a note designed for somebody who wants exposure to these indices but realizes there is more volatility in them than it was just a few years ago.

“If the market is range bound, having a cap associated with a barrier makes sense.”

The notes will be guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. is the underwriter with Morgan Stanley Wealth Management as a dealer.

The notes settled on Thursday.

The Cusip number is 36260Y179.

The fee is 3.5%.

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