GS Finance’s leveraged notes linked to Nasdaq-100 Technology Sector offer defensive bull play

By Emma Trincal

New York, Dec. 16 – GS Finance Corp.’s 0% leveraged notes due Dec. 28, 2023 linked to the Nasdaq-100 Technology Sector index may appeal to investors seeking exposure to the highly volatile sector with a margin of safety.

If the index return is positive, the payout at maturity will be par plus 1.1 times the index return, subject to a 90% cap. Investors will receive par if the index declines by 25% or less. If it declines by more than 25%, investors will lose 1% for every 1% that it declines from the initial level.

Risky underlying

“So much depends on your outlook, but you’d have to be looking for direct technology exposure. It’s a very concentrated index,” said Jerrod Dawson, director of investment research at Quest Capital Management.

The index consists of 39 technology stocks in the Nasdaq-100 index. Nearly 50% of the portfolio consists of semiconductors.

The top holdings in the index are Skyworks Solutions, Inc., Advanced Micro Devices, Inc., Nvidia Corp. and Apple Inc.

“There’s a place for it if you invest in sectors. We tend to avoid narrow sector bets and stick with broader index exposures.”

Risk-adjusted return

The 90% cap over four years with 1.1 times upside leverage provides a maximum return of 17.4% on an annualized compounded basis.

“It’s a high cap, but it’s also the tech sector. I don’t think you’re getting compensated enough.”

The index is up 43% year to date.

“The tech group is pretty rich right now. It’s doing quite well. I don’t think the 25% on the barrier side is quite enough, especially at these levels. We’re seeing 1999-kinds of levels in some cases.

“It would have been different if it was a buffer.”

Different outcome

Another adviser considered the notes superior to buying an exchange-traded fund tracking the underlying index.

“Assuming you already want to own tech stocks, this seems like a good way to get the exposure,” said Jerry Verseput, president of Veripax Financial Management.

“You’re not losing much in order to get that 25% downside protection.”

Verseput said the notes are best suited for bullish investors. The low leverage factor suggested strong growth in the index in order to reach the cap.

Market expectations

While the cap was attractive, it may not be easily attainable.

“I have a feeling the next four years are not going to look anywhere like the last four,” he said.

“Politically we have a lot of things to go through over the next four years.”

The risk of getting index exposure over a long tenor with a modest leverage factor is to “lose” a high amount of dividend revenues, he said.

But it was not the case with this deal as the index yields only 1.19%.

“The 1.1 times leverage will pretty much make up for your dividends,” he said.

“You’re not giving up much, and you’re getting this margin of safety.

“What’s not to like?”

Notes versus ETF

Verseput is not buying growth notes at this time. His market return expectations for the next few years are too modest.

“I prefer target returns. Give me an 8% yield for the next four years with a high probability of getting paid. That would be a 32% cap, not a 90%. But I prefer to maximize the chances of getting my return.”

However, for growth-oriented investors seeking direct exposure to technology, the notes offered a more conservative approach than being long the index.

“The other way to get the exposure is to own the index fund with zero protection.

“By giving up a little upside, you’re getting the 25% downside protection. Is it enough? No, but it’s better than the alternative of just owning the ETF.”

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

Goldman Sachs & Co. LLC is the underwriter.

The notes are expected to price Friday.

The Cusip number is 40056XTF3.

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