GS Finance’s autocalls on S&P MidCap 400 offer the best at the end, adviser says

By Emma Trincal

New York, April 18 – GS Finance Corp.’s 0% autocallable index-linked notes due May 4, 2026 linked to the S&P MidCap 400 index offer desirable outcomes, but the downside risk and the chances of underperforming the index should not be overlooked, advisers said.

The notes will be automatically called at par plus 15% if the index closes at or above its initial level on April 29, 2024, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called and the index return is positive, the payout at maturity will be par plus 215% of the index gain.

If the index is flat or declines by up to 20%, the payout will be par.

Otherwise, investors will be fully exposed to the decline of the index from its initial level.

Barrier of entry

Jerry Verseput, president of Veripax Wealth Management, said he would strengthen the downside protection.

“That’s a good note. I would put a buffer on it though. Then you know you’ll beat the market. With the barrier, if the index is down 21%, you’re down 21%,” he said.

“When a note tracks a stock index, I always use a buffer. If I try to improve my return compared to an index, which is what structured notes are for, I want to be able to outperform on the upside and on the downside.”

Changing the protection

Asked what buffer size he would settle for, he said: “nothing less than 15%.”

The most obvious compromise would be to reduce the leverage factor.

“I may be able to lower the leverage down to 1.5 or 1.8 so I can be sure to beat the index on the upside. But it would be part of a discussion with the issuer. I would let them run the numbers first,” he said.

Another way to replace the barrier with a buffer may be to lower the call premium.

Verseput was reluctant to adopt this approach.

“It’s an option. Maybe. I could go down to 12%. But you have to be careful because that’s an area where the client could get upset. If the market is up 25%, you have a problem,” he said.

The preferred route would be to “trim some of the upside leverage,” he said, adding that “I would have to see how the trade looks.”

Overall, Verseput liked the structure. The underlying was also attractive.

“It’s a good index. The MidCap 400 tends to track the Russell 2000 pretty well, and the asset class is a good story for clients,” he said.

One-year call scenario

A financial adviser said the odds of ‘winning” were substantial with the structure. He based his analysis on back-testing data going back 23 years using the iShares Core S&P Mid-Cap ETF.

“I like it,” he said.

“Three-year...that’s what I would call intermediate, but it could be as short as a one-year with the autocall.”

This adviser said his clients may not be familiar with the S&P MidCap index.

“It’s a little bit different. But that’s fine. It may also be more volatile than the S&P 500, but you still have 400 stocks in there,” he said.

He first analyzed the call scenario at the end of the first year.

He found from his data a frequency of getting a positive return over a one-year period of 70%.

“That means I’ll get the 15% call premium 70% of the time,” he said.

“That’s really good. If I get called out at 15%, I’m going to be pretty happy.”

Within that positive return bucket, the chance of getting between 0% and 15% was 30%.

“30% of the time, I’m going to outperform the market if I get called,” he said.

This left a 40% chance of underperforming the index on the upside if the index finishes up and above 15%.

“Your chances of being capped out are significant. I guess it’s one of the risks, and you can’t ignore it. But again, most people would be happy with 15% a year. You just have to be comfortable with the outcome,” he said.

This decision was similar to the process of selecting the right strike price when selling a call option, he said.

Three-year and leverage

This adviser looked at the second scenario in which the notes mature at the end of the third year.

A negative return was observed 30% of the time within a three-year rolling period. Within this negative bucket, the breach of the barrier occurred only 4% of the time, leaving investors with a 26% chance of getting their principal back.

“The barrier does an excellent job at protecting you; and the odds of losing money are pretty small,” he said.

“It makes me feel pretty comfortable.”

Good ending

Interestingly, the three-year holding period scenario offered the best opportunities, he said.

“Not getting called after a year is a win in this situation. It’s only if you hold the notes until the maturity that you have a chance to double your gain and this time without a cap,” he said.

Investors are also facing the risk of losing money, he added.

“But the probabilities of a loss are very small.”

The chances of losses may be further reduced by the automatic call event, which eliminates the risk.

“I don’t know how to calculate the risk based on the two different scenarios, first the call or no-call then the downside at maturity. All I can say is that the barrier seems to be pretty solid,” he said.

This adviser said he had not seen that structure before and was surprised by its advantages.

“I’m stretched to find a problem with this note,” he said.

“This is a really good structure. Most times you have to be in the five-year range to get these kinds of numbers. To be able to price two-times the upside without a cap on a three-year note is pretty amazing even though chances are it may just be a one-year.

“But even the one-year scenario is attractive. You would have to be extremely bullish to complain about getting 15% after one year,” he said.

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the agent.

The notes will price on April 27 and settle on May 2.

The Cusip number is 40057RHR2.

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