Goldman Sachs Bank USA’s CDs tied to Dow aimed at risk-averse investors

By Emma Trincal

New York, Aug. 24 – Goldman Sachs Bank USA plans to price 0% certificates of deposit due Feb. 28, 2025 linked to the Dow Jones industrial average, according to a term sheet.

If the index return is positive, the payout at maturity will be par plus the index return, subject to a maximum payout that is expected to be $1,500 to $1,580 per $1,000 face amount of CDs and will be set at pricing. If the index return is zero or negative, the payout will be par.

Steven Foldes, vice-chairman of Evensky & Katz / Foldes Financial Wealth Management, said he would not be investing in the structured CDs because his views are too bullish.

Cost of protection

“I guess there will always be customers for those full-principal protection products. It’s obviously attractive. My concern is the price you’re paying to get this protection,” he said.

The full downside protection in his view was not needed and too costly.

“It’s somewhat illusory to want full downside protection over a seven-and-a-half year period,” he said.

“There are very, very few chances that a major index like the Dow Jones would end up negative at the end of that long stretch of time.

Long tenor

“In any event, a seven-and-a-half year note for us is way too long.”

It was not so much the credit risk exposure that was of concern since he said he was comfortable with the issuer’s credit –“Goldman is a large bank” – and given the FDIC insurance against negative credit events offered to CD buyers under certain limits.

“You’re just holding this product for a very long time. Your money is tied up. We don’t love that,” he said.

In addition to the lack of liquidity, a long maturity as seen with this product will also increase the opportunity cost, which is the result of not receiving dividends. Those will compound more over time.

Opportunity cost

“You’re paying dearly by not getting the dividend,” he said.

The Dow Jones industrials yield 2.17%, which represent a 17.5% return on a compounded basis over the holding period.

Assuming a 54% cap set a mid-point of the range, investors are only getting a 37% real rate of return over the seven-and-a-half year period when taking into account the dividends, he said. This represents a 4.30% compounded return per annum, he added.

Cap

“If a client is predisposed to invest in the Dow Jones, the likelihood is that they’ll get the historical average of about 10% per year,” he said. “The return you’re getting here is quite modest relative to the Dow.

“You’re getting a return but you’re giving up a significant amount of return.”

Defensive play

A market participant had a different approach, focusing more on the defensive characteristics of the product designed for risk-averse investors.

“It’s a good product for someone who wants some exposure to the equity market but is concerned about the downside risk. It’s a good vanilla way to take a position. You get the full protection and the tradeoff is the cap,” said this market participant.

“For somebody close to retirement, it makes a lot of sense.”

Bear in sight

He objected to the idea that the protection would not be needed over a long period of time.

“The notion that the market is down only a short period of time and then comes back up is not necessarily true,” he said.

“After the 1929 Crash the market didn’t come back until 1954. It took 25 years for the Dow to fully recover,” he noted.

This market participant said that he was inclined to be pessimistic.

“I think we’ll see a very bad crash with two-thirds of the value wiped out. This long bull market was completely orchestrated by the Fed. People are going to suffer losses in the market. The Fed will try to print money but this time it won’t work,” he said.

Even investors’ behavior is likely to be transformed in the future, which is why structured CDs have their place in a client portfolio, he added.

“People will lose a lot of money and they will be devastated. They won’t be investing the way they’re investing today. The psychology will change,” he said.

From that perspective buying protection now while its price is not excessive yet was a “reasonable approach,” he concluded.

Goldman Sachs & Co. is the underwriter. Incapital LLC is distributor.

The CDs are expected to price on Friday.

The Cusip number is 38148DXA7.

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