GS Finance’s trigger jump notes on Stoxx offer attractive alternative to index, advisers say

By Emma Trincal

New York, July 12 – GS Finance Corp.’s 0% trigger jump securities due July 19, 2024 linked to the Euro Stoxx 50 index could lead to better outcomes than buying the index fund outright, advisers say.

If the index return is zero or positive, the payout at maturity will be par plus the greater of the return of the index and the upside payment of at least 30.2%, according to a 424B2 filing with the Securities and Exchange Commission.

The payout will be par if the index declines by 10% or less. If the index declines by more than 10%, investors will lose 1% for each 1% decline from the initial level.

Jump advantage

“You’re giving up the dividends and the liquidity for what seems to me like a pretty good tradeoff,” said Jerrod Dawson, director of investment research at Quest Capital Management.

“When I look at a structured note, I always compare it with being long the underlying. In this case what are you giving up when you buy the note versus buying the index? Not much in my opinion.”

The Euro Stoxx 50 index has a 2.19% dividend yield, which investors in the notes are not entitled to earn.

But the 30.2% upside payment more than compensates investors for the “loss” of dividends, he said.

“If the index is less than 30%, you’re better off with the minimum return. If it’s higher you’re not capped. You get the full index upside, which is great.

“On the upside, the benefit is favorable to investors. Sure, if it’s up over 30% you don’t get the dividends. But no one is going to be unhappy with 30%.

“There’s no real free lunch and this is not perfect. But it’s pretty fair.”

Better than zero

The downside structure did not offer a wide range of protection and the protection it did offer, unlike that of a buffer, was contingent. Still Dawson said the notes there again were “favorable” to investors.

“You get the 90% barrier. It’s 10%. That’s pretty small. But it’s still better than being long the index,” he said.

Investors in the index fund would benefit from the compounded dividends, which they could use to cushion themselves against a potential decline in the index. But while the dividends would act as a buffer, the amount of protection would still be slightly less than the 10% amount of barrier protection.

“You could still be lucky and see the index fall within the 10% range. It’s a three-year note. It’s not hard to imagine a sell-off tomorrow followed by a strong rebound.”

In that scenario and depending on the strength and length of the recovery, the index could end up flat or moderately up, which would be a positive outcome. Or perhaps, the decline would fall within the 10% margin since the observation is only three years from now, he said.

Dawson said that for investors seeking exposure to European stocks, the notes may offer a more attractive option than a long position in the index fund.

“It’s an advantageous trade compared to buying the index outright. The tradeoff is to your benefit. The barrier is small but 10% is better than nothing.

“You give up the dividends for the kicker on the upside and the barrier, even if it’s a small one. That’s a favorable tradeoff.”

Cost

One aspect of the deal however was less satisfactory than the rest, according to this adviser who pointed to the 3% fee disclosed in the prospectus.

“It seems a little bit high. I’d prefer to see something lower,” he said.

“I usually look at the big picture. If for instance a mutual fund charges a high fee, I don’t particularly mind if they can outperform the market.

“But in the real world, clients don’t see it that way. When the cost of a note is high, they hesitate before buying.

“They feel they’re giving the bank 100 to invest 97. That doesn’t always sit well with them.”

Attractive upside

Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, shared Dawson’s positive view on the structure.

“I don’t know how they did it but to me it seems pretty attractive,” he said.

“They obviously used the dividends to price it.

“But even without the dividends, investors are being offered this guaranteed return on the upside. That’s still attractive.”

The notes may offer a good way to gain exposure to European stocks for investors lacking a strong bullish conviction on this part of the world.

European future

“Europe has been stagnant for a long time,” he said.

“During the last decade, the U.S. has done much better than Europe. Equity performance trends in international markets can last for a decade. With the broader recovery underway, we may be at the beginning of a European stock market rebound from the previous lackluster decade.”

For investors mildly bullish on the asset class or unsure whether and when the region may finally outperform other markets, the notes offer a “decent way to get exposure,” he said.

“It gives you real good terms.”

Worthwhile tradeoff

“If I was comparing this note with the index, I would pick the note because it’s more attractive even without the dividends,” he said.

“If the index is flat, you have the 30% booster...You’ll outperform,” he said.

“If it’s up more, you’re missing a little bit of return since you don’t get paid the income but you’re still getting the 30%.

“Overall, the odds of getting that 30% return are pretty high, I think.”

The more relevant difference between the note and the index was on the downside. Chisholm also noted that unlike the equity investors who can still earn the dividends, hence use them as a buffer against losses, noteholders can only rely on the barrier.

“You’re missing out on the buffer, and I certainly prefer buffers but you’re getting a clear advantage on the upside.

“I’m willing to give up the dividends for that.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the agent. Morgan Stanley Wealth Management is the dealer.

The notes will price on July 16 and settle on July 21.

The Cusip number is 36261B244.

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