Advisers find better alternatives to two GS Finance leveraged capped notes on S&P 500

By Emma Trincal

New York, April 1 – Advisers compared two offerings of 18-month leveraged capped notes brought to market by GS Finance Corp. on the same day and tied to the same index. One was buffered with lower cap levels and leverage multiples than the other. In both cases, advisers found the potential upside too limited by the caps.

They said they could find better alternatives with an income-oriented structured note or a structured exchange-traded fund.

GS Finance priced $5.46 million of 0% buffered PLUS notes due Sept. 22, 2022 tied to the S&P 500 index, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus 200% of the index gain, capped at par plus 12.75%, if the index finishes above its initial value.

Investors will be exposed to the losses of the index beyond a 5% buffer.

The other deal, GS Finance’s $3.9 million of 0% Performance Leveraged Upside Securities due Sept. 22, 2022 linked to the S&P 500 index, offers no downside protection.

In exchange, the notes raise the cap level to 16.3% and the leverage factor to three.

Sideways outlook

Steve Doucette, financial adviser at Proctor Financial, said the notes would only fit a very muted outlook.

“I’m not sure which one I would pick,” he said.

“5% at least is something. It’s not much but it gives you a little bit of outperformance on the downside.”

In both cases, the upside was the main concern.

“The index needs to be up a little bit more than 4% a year on the buffered one. After that, you’re capped out. For the other, the one with no buffer, it gets you there if the index is up 3.6% a year. That’s really low.

“Your expected losses and returns have to be so limited... You really have a very narrow window of outperformance,” he said.

Only investors confident about the market moving sideways for the next 18 months could benefit from the notes.

“You’re betting on a market going nowhere. With the volatility we have right now and the S&P that just hit a new high [on Thursday], I don’t know if it’s a wise bet. Even if it is, you’re not getting a huge amount of return. All you’re really getting is this 5% buffer, but that’s giving up a lot of potential upside for a 5% protection level,” he said.

Go autocall

When the cap is hit, the annualized compounded return is 8.33% with the buffered notes and 10.6% with the other product with no buffer.

The additional return for abandoning the 5% buffer while increasing the leverage is 2.27 percentage points.

“If I was forced to choose, I would still take the one with the 5% buffer so I can at least outperform on the downside regardless,” he said.

“But can I get excited about the notes? Not really.

“Those returns are very low. I’d much rather get an 8% or 9% coupon with an autocall and put a 40% barrier.”

Doucette conceded that an autocallable payout with a contingent coupon in that range would probably require more than one underlying index.

“It would still be a better option,” he said.

“If my cap is that low, I’m better off with an autocall, even a worst-of.

“The market is volatile. We’re at all-time highs. I wouldn’t want to lock myself up for 18 months without a much more meaningful protection level.”

Quickly capped out

Jeff Pietsch, founder of Eastsound Capital Advisors, was also disappointed with the potential gains.

“These caps in both cases are easy to hit,” he said.

“The leverage differential doesn’t make that big of a difference.

“I’d still prefer to get the higher return, the 16.3% cap versus 12.75%. If it means giving up the buffer, that’s OK. A 5% buffer doesn’t do anything really.”

Accelerated ETFs

Rather than choosing between the two notes, Pietsch said he saw a better alternative in “one of those new accelerated buffered ETFs.”

Structured ETFs providing buffered exposure on broad-based indexes have been available to investors for a few years. But Innovator Capital Management, LLC, the pioneer in this field, launched on Thursday its first suite of accelerated ETFs. Those, similar to structured notes, offer asymmetrical leverage. Investors get a multiple of the upside up to a cap, but the downside is one-to-one from initial price or from the buffer level if any.

Pietsch pointed to the Innovator U.S. Equity Accelerated 9 Buffer ETF, which provides on a one-year period, two-times the gain in the S&P 500 index up to a 10.2% cap and a 9% buffer on the downside.

The new ETF was expected to list April 1 on the CBOE under the symbol “XBAP.”

These ETFs reset annually and can be held indefinitely. They trade on the exchange and can be redeemed daily, according to the company’s website.

“Although the liquidity is not as deep as you would expect, those buffered ETFs are competing more and more with structured notes,” Pietsch said.

“I think it would be a better alternative in this case.”

The notes are guaranteed by Goldman Sachs Group, Inc.

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

Both deals priced on March 17 and settled on March 26.

The 2.6% fee was identical in both deals.

The Cusip numbers for the buffered notes and the second deal are 36259Y826 and 36259Y834, respectively.

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