GS Finance’s leveraged notes on Invesco Solar ETF offer speculative bet on popular green view

By Emma Trincal

New York, Feb. 25 – GS Finance Corp.’s 0% leveraged notes due March 10, 2025 linked to the Invesco Solar exchange-traded fund was one of the latest structured notes announcements to tap into renewable energy investing, a space that has become popular to the point of raising “bubble” concerns.

Advisors noted the rich valuations of the sector while contemplating using the note for a small, speculative bucket.

The payout at maturity will be par plus 4 times any ETF gain, subject to a maximum payout of $2,000 per $1,000 principal amount, according to a 424B2 filing with the Securities and Exchange Commission.

If the ETF finishes flat or falls by up to 40%, the payout will be par.

Investors will share fully in losses if the ETF falls by more than 40%.

Upside

“You get a 25% annual return or 20% compounded. That’s pretty neat. But the fund is already up almost 400% from March. So, it’s very volatile. Now I don’t think anyone could argue with a 100% cap. I like the cap. If you believe in solar energy you can capture a pretty good return,” said Steve Doucette, financial adviser at Proctor Financial.

Big mover

The ETF replicates the MAC Global Solar Energy index, which tracks the global solar energy equity sector.

The ETF closed at 97.65 on Thursday, a 362% gain from its 21.13 low of March. However, the share price has recently dropped 22.5% since its recent high in late January. During the February-March bear market last year, the fund plummeted 50%.

The 64% implied volatility reflect the magnitude of those moves both up and down.

Downside risk

Doucette, who himself is an end-user of solar energy, said the “underlying is great.”

The 60% barrier appeared solid, he said. But volatility should be considered.

“If you’re wrong about the sector, 40% may not be enough,” he said.

“If the price retraces back to where it was in March, you could be in trouble.”

A drop to the low of March 18 would represent an 80% price drop.

Bullish

But for a four-year duration, Doucette had a bullish outlook.

“The new administration is pushing for green energy, which should boost the sector,” he said.

“I’m not really concerned about the downside.

“If you believe in the technology, and I think I do, it’s a good way to play the sector.”

He said the bid on solar energy stocks will be a long-term trend.

“It’s the right thing to do. It’s a conversion to renewable energy. It’s going to do well over the next four years.

“I will take a look at this one. I may do a small trade on it,” he said.

Popular sector

Matt Medeiros, president and chief executive of the Institute for Wealth Management, was intrigued about the offering. The notes will benefit from the compelling pro-green environment pushed by the new administration, he said.

“Money is moving into the space rapidly. Overall, investors have turned bullish on ESG. We’re seeing a lot of demand for these types of new investments,” he said.

For several years now, Wall Street has adopted in addition to its traditional fundamental analysis a new approach, which rates companies on a “socially conscious” scale based on environmental, social, and governance (ESG) criteria.

Some institutional mandates require a minimum allocation to ESG assets.

“This note absolutely fits into the ESG category. Yet I don’t see Invesco labeling it as such. Given the popularity of the ESG concept, I’m surprised it’s not advertised an as ESG portfolio on their website,” he said.

Valuations

Medeiros said that president Joe Biden’s energy plans will have a bullish impact on the sector.

“The government is going to support and mandate environmentally friendly investments. It’s going to help,” he said.

“Certainly, the huge inflows into ESG funds reflect those market anticipations.”

“Will green energy be the focus for the next four years? I have no doubt about that.

“The concern is: will the sector be profitable as an investment?”

Another concern was the entry price of the underlying fund for investors buying the note today.

“This ETF is trading at a very high price. While the four-year maturity reduces the risk, I would still be concerned about current valuations,” he said.

“I would probably use it in my speculative bucket.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the agent.

The notes will price on March 5.

The Cusip number is 40057FJA3.

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