GS Finance’s $1 million autocalls on Semiconductor ETF offer ‘reasonable’ bet, adviser says

By Emma Trincal

New York, June 9 – Advisers had a positive opinion on GS Finance Corp.’s $1 million of autocallable contingent coupon ETF-linked notes due June 8, 2026 linked to the stock performance of iShares Semiconductor ETF due to the product’s high coupon and the likelihood of receiving it given the barrier levels and current underlying share price.

The notes will pay a contingent quarterly coupon at an annualized rate of 17.15% if the stock closes at or above the coupon barrier price, 75% of the initial price, on the valuation date for that period, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be automatically called at par plus the contingent coupon if the stock close at or above the initial share price on any quarterly valuation date after six months.

If the stock finishes at or above the 65% final barrier price, the payout at maturity will be par. Otherwise, investors will be fully exposed to the losses of the stock.

High yield

“This is a good note. I expect it would be called at some point, prior to maturity. If that’s the case, the return you get for that shorter timeframe is very rewarding,” said Matt Medeiros, president and chief executive at the Institute for Wealth Management.

The minimum gain on the first call six months after the pricing date would generate a return of 8.6%.

“To get close to 9% in six months is really attractive,” he said.

Medeiros said the stocks in the semiconductor industry are likely to continue to be volatile.

“But I’m optimistic. There’s still a backlog, and we’ll continue to see strong demand in the space. I like the underlying fund,” he said.

Entry point

The ETF is down more than 25% from its $559 January high. It closed at $403.64 on Thursday.

At pricing last week, the ETF closed at $421. While higher than today, the initial price was still 24.7% off the peak.

“You’re pricing the notes at a time when the ETF is nearly 25% below its level at the start of the year, which was also its high,” he said.

“That entry price is appealing. With a 35% protection at maturity, I’m not really worried about breaching the barrier, especially four years from now. Statistically, the chances of such outcome are very low.”

Income product

Medeiros compared the payout to that of an absolute return product.

“They have something in common. The underlying does not have to be up. You’ll get paid whether the market is up or down, as long as it’s not down more than 25%. This condition is easily achievable considering the recent pullback,” he said.

The size of the coupon but also the likelihood of receiving it were seen as positive as well.

“In this volatile, uncertain environment, investors will be attracted to structures with a dependable return,” he said.

The volatility seen among semiconductor stocks allowed the issuer to price “richer terms,” he said.

“You get 17% a year. The number is great. But the predictability is better.”

A few misses

Lance Roberts, chief investment strategist at Clarity Financial, was also inclined to express a favorable view on the note.

“This is a reasonable bet if you think the bottom for semiconductors is in,” he said.

“A lot depends on demand, on the economy in general and on a potential recession.

“You already had a big chunk of price decline so far this year. That should help.”

The coupon payment was not guaranteed. But the 75% coupon barrier along with the recent sell-off increased the odds of collecting the income, he said.

“You may have a year or two where you don’t get anything and that’s the risk.

“But over four years, you should get a pretty decent return given the 17% yield,” he said.

Market risk

The small size for what appeared to be a relatively attractive deal did not surprise him.

“It’s probably for somebody getting out of a position, either Goldman themselves or one of their clients. You can see small trades like that when this happens,” he said.

The market risk at maturity appeared slim.

“Having a longer timeframe gives the sector more chances to recover. Again, you may miss a few coupons, but the risk of principal loss is reduced,” he said.

One caveat however was the current valuation of the ETF.

“Semiconductor stocks are still expensive even with the decline. We could see another year or two of volatility. This is definitely a sector that will be more vulnerable if we have a recession.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the agent.

The notes settled on June 3.

The Cusip number is 40057M6H7.

The fee is 0%.

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