GS Finance’s $8.21 million notes on iShares MSCI India offer leveraged bet on surging market

By Emma Trincal

New York, Sept. 17 – GS Finance Corp.’s $8.21 million of 0% leveraged ETF-linked notes due Oct. 12, 2022 tied to the iShares MSCI India exchange-traded fund are designed for mildly bullish investors seeking to capture some of the high returns of a volatile emerging market via leverage but bullish enough to be comfortable investing without any downside protection, advisers said.

If the ETF finishes above its initial value, the payout at maturity will be par plus 2 times the ETF gain, capped at 10.98%, according to a 424B2 filing with the Securities and Exchange Commission.

The notes are guaranteed by Goldman Sachs Group, Inc.

Investment rationale

“As a disclosure, I own this ETF,” said Jeff Pietsch founder of Eastsound Capital Advisors.

“India has been on fire for the last several months. It has kept pace with the S&P since the pandemic after a number of years of underperformance.

“That said, fundamentally, investors should know that this ETF trades near a 20-year high from a P/E perspective, its P/E exceeding 30 times.”

Pietsch pointed to two circumstances in which buying the notes could be justified.

“If you’re an advisor that has a low single digit expectation on India for the next 13 months, I can see using that as an accelerator without additional downside. This would be a good fit in this particular case,” he said.

“Alternatively, if you have a larger long/short strategy, if this note is one component among several others, for instance if you’re long India and short something else, I can see that making sense too.”

Top performing fund

What moved up the price of this ETF is a culmination of momentum bets, he said.

After a second wave of Covid-19 in March and April, the Indian economy has strongly rebounded. Other factors, such as China, have contributed to the rally.

“It’s safe to assume that many investors buying emerging markets stocks may have redirected some of their Chinese exposure to India at least momentarily given China’s regulatory crackdown,” he said.

“Whatever the causes of this uptrend, India is in full momentum.

“Investors need to keep in mind that a lot of momentum strategies tend to play out over two, three or maybe four months, not 13 months.”

The iShares MSCI India fund has surged by 54% over the past year while the S&P has gone up 33.5%. The ETF hit an all-time high as recently as Thursday.

Momentum

“Unless you can position this in a long/short portfolio or have a low single-digit expectation, I wouldn’t jump on this if you’re a momentum trader,” said Pietsch.

“Momentum makes India an interesting story. How this story ends is going to be told in less than 13 months.

“Right now, India is absolutely on fire in spite of having a pretty tremendous Covid setback.”

Since investors are fully exposed to a decline in the share price, other alternatives may be more appropriate for investors who want to participate in the growth of the Indian market, he said.

“If you’re strongly bullish why not buy the Direxion leveraged ETF? You get 2x up and 2x down. Yes, it’s 2x down but if you’re really, really bullish, why not? You can buy and sell those shares anytime,” he said.

He was referring to the Direxion Daily MSCI India Bull 2x ETF.

Narrow range

Another financial adviser said he was not impressed by the risk-adjusted return of the structure.

“You’ll outperform the ETF within such a narrow band,” this adviser said.

“You only need to be up 5% a year to hit the cap.

“In addition to that you have no buffer and not even a barrier on the downside. You have to be really confident that this ETF won’t finish lower 13 months from now. That’s a bet I’m not sure I’d be willing to take.

“You’re just positioning yourself for an uptrend of 5% a year or less. This is a very small range to make a bet on a single country. And you’re talking about a very volatile emerging market country.”

High entry

The intensity of the bull market in this South Asian nation does not give investors a safe entry point from a valuation standpoint, he added.

“Over the last five years, this ETF has lagged the S&P 500. It was not even that hot until March of last year. Now it has outperformed the U.S.,” he said.

Both the S&P 500 index and the India ETF bottomed in March of last year at 4,433 and $20.48, respectively. Since then, the S&P has gained more than 93% while the India ETF has jumped 141%.

This adviser said the ETF’s strong growth made investors vulnerable to a strong downturn.

“I don’t find this deal very attractive.

“Country-specific bets, especially on emerging markets, are tricky.

“Do you want to take that risk with the unlimited downside? I don’t,” he said.

Goldman Sachs & Co. LLC is the agent.

The notes (Cusip: 40057JCR5) priced on Sept. 7 and settled on Sept. 14.

The fee is 0.85%.

On Sept. 8, GS Finance Corp. priced an additional; deal for $11.58 million. It was a nearly identical issue, the only difference being the cap set at 11.76%.

There has been only one other deal this year based on the iShares MSCI India ETF. GS Finance was also the issuer. It priced $17 million of it at the end of August.

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