Advisers discuss value of 50% buffer in GS Finance’s autocallable notes tied to S&P 500

By Emma Trincal

New York, May 9 – GS Finance Corp.’s 0% buffer autocallable securities due May 13, 2027 tied to the S&P 500 index offer an unusually big buffer with uncapped participation. But advisers held different opinions about the value of the large buffer over a five-year period depending on their respective market outlook.

The notes will be called at par plus 13% to 15% if the index closes at or above its initial level on May 9, 2024. The exact call return will be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus any index gain.

If the index falls by up to 50%, the payout will be par. Otherwise, investors will lose 1% for every 1% that the index declines beyond the 50% buffer.

No historical precedent

Carl Kunhardt, wealth adviser at Quest Capital Management, was not impressed by the buffer.

“I’m not aware of a five-year period where the S&P has been negative. Having this 50% buffer is a moot point,” he said.

He assumed the issuer may have had no great difficulties in pricing the buffer because the odds of using it were small, especially with the autocallable feature after two years.

“They’re trying to wow you with a 50% buffer, but we’re not going to go anywhere close to minus 50% in five years assuming the notes will be held for five years,” he said.

For this adviser, the benefits of the upside payout were limited.

“We are in a correction right now. The S&P is already down 16% this year. There is no leverage at maturity. So, what is the difference between owning a Vanguard fund and holding this note except I’d be getting my dividends with the Vanguard,” he said.

“There is no upside value.”

A two-year cap

The call feature was another drawback.

“In two years, the notes will get called and you’ll end up with only 7% a year. That’s the play,” he said.

“The real question is: can I get more than 7% a year in two years? You bet I can since we’re starting from a hole.

“The market has already been hit by major losses this year. Usually, you recover from such lows. You tend to have outsized returns.”

He predicted double-digit returns in two years.

“Why would I want a call premium of 7% a year just to pay for a buffer I’m not even going to use?

“I don’t think there’s anything of value in this note.”

“You’d be much better served by just holding the position long,” he said.

Kunhardt picks notes when he has a chance to outperform the underlying with a note.

“If you’re going to do a structured note, which is not a real security but a made-up security, you need to add value over just being long the position,” he said.

“Given historical precedents, this note does not give you any added value. It’s just a distraction.”

New paradigm

Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, held a very different view.

“Although it’s a little bit complicated to explain, I kind of like the note,” he said.

“I love the 50% buffer. That’s exactly what people need in this market: big buffers.

“We’re going through a paradigm shift right now. We’re at the beginning of a bear market, something most people haven’t realized yet.

“And during bear markets, protection, not growth, is paramount. If you focus on growth, that’s when you lose a lot of money.”

After a brutal sell-off on Monday, the S&P 500 index was closer to a bear market, down 17% from its January high. The Nasdaq-100 index is now deep in bear market territory as it closed on Monday 28% off its November 52-week high, shedding 4.3% for the day.

Early exit welcome

For Chisholm, the occurrence of a call in two years was beneficial to investors.

“A lot of people would be happy with 7% a year in this environment. In fact, a 50% buffer might not be enough. So, getting called in two years might be a great outcome,” he said.

Depending on its severity, a bear market, even short-lived, can drag down performance for years.

“Many people don’t understand the nature of a bear market. Most people don’t realize they are in a bear market until it’s too late,” he said.

He pointed to the 13 years following the dot.com bubble burst in 2000.

“The S&P didn’t go anywhere until 2013,” he said.

Doubtful soft landing

Chisholm’s view is bearish because the does not believe that the Federal Reserve’s tightening efforts to tame inflation can lead to a soft economic landing.

“They’re facing a major conundrum. Do they save the economy, or do they fight inflation? They can’t do both. If they choose to save the economy, the inflation will be out of control. If they focus on reining in inflation, the economy will suffer.

“Right now, it looks like they’re taking us into a recession deliberately.

“That’s why I want as much protection as I can get,” he said.

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the agent. UBS Financial Services Inc. is the selling agent.

The notes were expected to price on May 9 and to settle on May 12.

The fee is 2.5%.

The Cusip number is 36263Q249.

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