GS Finance’s $2.28 million airbag on Russell 1000 Value ETF offers fair cap in toppish market

By Emma Trincal

New York, June 25 – GS Finance Corp.’s $2.28 million of 0% capped airbag gears due June 15, 2023, linked to the iShares Russell 1000 Value ETF provide a generous cap for investors concerned about the current valuations of the underlying, yet still seeking to participate in the returns, advisers said.

If the ETF return is positive, the payout at maturity will be par plus 1.5 times the ETF return, subject to a maximum settlement amount of 20.7%, according to a 424B2 filing with the Securities and Exchange Commission. Investors will receive par if the ETF falls by up to 10% and will lose 1.1111% for each 1% ETF decline beyond 10%.

Toppish market

“This note is designed for somebody who is nervous about a market at all-time highs. They do want to participate but with some downside protection,” said Chip Strickland, financial adviser at Foothills Financial Strategies.

This adviser however was doubtful investors would receive enough protection against market risk.

“Buffers are good. But why would I want 10% only in downside protection? A normal bear market is going to bring a correction of more than 10%.

“You’re going to be on the hook for any decline beyond 10%.

“This 10% buffer doesn’t matter an iota until maturity.”

Bear risk

The question, he said, was to assess the risk of a bear market within the investment period.

“Two years is not enough time. Most bear markets last about two years and we’re already at record highs,” he said.

The iShares Russell 1000 Value ETF in particular hit an all-time high on June 9 at $174.59 a share.

As has been the case with other U.S. equity benchmarks, the recovery rally began at the bottom of last year’s Covid-induced bear market in March 2020. From that point up to the recent all-time high this month, the iShares Russell 1000 Value ETF rose 150%, outperforming the S&P 500 index, which during the same time and up to a fresh high on Friday jumped 87%.

The skyrocketing rise in the Russell 1000 Value index has led some analysts to say there is little value left in value stocks given how much they have outperformed the growth, large-cap segment of the U.S. equity market.

Crazy meme stocks

Part of it is due to the presence of two “meme” stocks as the top holdings in the ETF. Those are AMC Entertainment Holdings Inc. and GameStop Corp., two retail investors’ plays that sent the shares roaring because of social media-induced hype, derived from the small investors’ attempt to “squeeze” hedge funds’ short positions. Another factor behind the value rally has been a rotation out of growth stocks into value and cyclical plays since the fall.

“I see this trade as an all or nothing play. I put $100,000 and I’m hoping that in two years, I’ll get 20.7%,” said Strickland.

“I’m crossing my fingers because this index is overvalued and subject to a lot of risk on the downside. Any decline beyond 10% is a loss. And 10% is nothing.”

Bespoke notes

Strickland however said that his hesitations had more to do with his investment style than with the note itself.

“If you like to buy things off the rack, that’s an OK note. This is sold through UBS. It’s designed for a large audience, and there’s nothing wrong with that,” he said.

His firm however operates differently.

“We rarely buy off the shelves. We negotiate directly with the desks and ask the banks to design a product based on our own parameters,” he said.

“Just because this is not a deal for us doesn’t mean it’s a bad deal. It’s just something created for mass distribution. We do our own. It’s a whole different ballgame.”

For a minimum of $1 million, Strickland said he can negotiate decent terms with banks.

Autocallable preferred

But there was another reason behind this investors’ lack of interest in the notes: his shop is more focused on income products than participation notes.

“70% of my book of structured notes is going to be income,” he said.

Strickland’s clients include some institutions but mostly wealthy individuals in retirement, who need the income, he noted.

“I do autocallable barrier with monthly contingent coupon. Our clients insist on getting the monthly income.

“We also do market-linked step up autocalls.”

Those step-up notes often sold by BofA Securities feature annual automatic call dates with cumulative call premium. Investors either get paid upon the call or at the end. At maturity, they pocket the cumulated premium if the underlying is positive but below a step level, which typically coincides with the sum of the previously unpaid premium payments. Above the step, the notes pay one-to-one the underlying gain. A downside protection feature may or may not be included depending on the length of the term.

Reasonable play

Another financial adviser said he liked the notes.

“Value may have rallied in the past few months, but over the long term, it’s been underperforming the S&P a lot,” this other adviser said.

“It’s a good asset class to structure a note on. You can get a little bit of excess return if the rally slows down. If the index continues to run, at least you have a very decent cap.”

The 20.7% maximum return is the equivalent of a nearly 10% annualized compounded gain.

“The 2x leverage lets you get to the cap pretty easily.

“I like the structure. It’s very reasonable.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the underwriter with UBS Financial Services Inc. as selling agent.

The notes settled on June 17.

The Cusip number is 36260Y492.

The fee is 0%.

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