GS Finance’s $1.61 million autocalls, ETF-linked notes likely to deliver excess return

By Emma Trincal

New York, Aug. 31 – GS Finance Corp.’s $1.61 million of 0% autocallable ETF-linked notes due Aug. 31, 2026 tied to the Consumer Staples Select Sector SPDR fund and the SPDR S&P Oil & Gas Exploration & Production ETF surprised advisers by the wide range of potential positive outcomes for investors regardless of the market direction.

The notes will be automatically called at par plus an 18% call premium if each ETF closes at or above its initial value on Aug. 26, 2024, according to a 424B2 filing with the Securities and Exchange Commission.

If the return of each ETF is zero or positive, the payout at maturity will par plus 200% of the return of the lesser performing ETF.

If the worst performer falls by up to 33.5%, the payout will be par plus the absolute value of that ETF’s return.

Otherwise, investors will lose 1% for every 1% decline of the worst performer beyond 33.5%.

Due diligence

“The terms are pretty unbelievable. The only thing you need to do is your due diligence on the energy ETF. While consumer staples are pretty stable, energy is very volatile. You need to know how comfortable you are with that energy component,” said Steve Doucette, financial adviser at Proctor Financial.

The call premium was unusually high, he said.

“If you get called at 18% one year from now, that’s pretty good. If you don’t get called, having 2x and no cap is even better. And this 33% buffer is amazing. Even if the energy ETF is down 40% you only lose 7%,” he said.

Big buffer

The buffer played a very protective role.

“I can’t imagine that any of those two sectors would be down more than 33% three years out,” he said.

The absolute return extended the amount of possible excess return.

“It’s one of these where the worst-of can actually work to your benefit,” he said.

Given the absolute return range, investors may capture up to 33% in positive return on the downside, he said.

The greater the price drop within that range, the higher the potential gain. Doucette assumed that the SPDR S&P Oil & Gas ETF would likely be the worst performer on the downside given its volatility.

“As long as you don’t breach that 33% level, you’ll outperform in a massive way. The market is down 30%, you make +30%. You outperform by 60%. Sweet,” he said.

Winning outcomes

Overall, the structure allowed noteholders to outperform in a number of ways, he added.

“You would only underperform if you get called and the ETF jumps more than 18%.

“But who’s going to complain about 18% a year? This is a really good return,” he said.

Otherwise, investors would outperform the worst-of in nearly all other scenarios, he added.

“If it’s down no matter how much down, you outperform. If you’re called and the return is less than 18%, you outperform. If you hold the notes until maturity, you outperform,” he said.

Replication

Doucette said he liked the structure but may want to modify the underliers.

“I like the concept.

“I’m curious if we’re going to see copycats for this deal. I’m definitely interested in looking into it.

“I wonder if you could negotiate something similar but with broad-based indices. You won’t get the same parameters though. A lot of the good terms come from the volatility of the energy component, which is the part I’m not 100% comfortable with,” he said.

High premium

Matt Medeiros, president and chief executive of the Institute for Wealth Management, also expressed a positive view.

“This is a really interesting note.”

“Eighteen percent: that’s a very high return,” he said.

Expecting more was not reasonable in today’s market, he said.

“There are times when you can say: I want all the juice I can get. But today, I just want to get paid what I need. It’s not a good market to be greedy,” he said.

The conditions for the automatic call increased the odds of getting the premium.

“You don’t even need any of those two to be up a lot. Even if they’re flat or up just a little bit, you’ll get paid,” he said.

Non directional

Worst-of payouts, however, always bring an element of surprise. Investors do not know ahead of time what their return will be linked to.

“I can’t predict which one would be the worst-of on the upside. It’s hard to make that kind of call over three years. But in the downside scenario, for sure energy would drop more than consumer staples,” he said.

The absolute return and return enhancement benefited investors regardless of the direction of the market.

“Getting 2x the return with no cap is very nice especially on a three-year,” he said.

“The 33% buffer is substantial and I really like the absolute return component.”

Sector at risk

If this adviser had to be more “concerned” by one underlying than the other, it would be the SPDR S&P Oil & Gas ETF, he said.

“I don’t think energy is going gangbusters anytime soon. There are a lot of pressures on the drillers. The only chance for the sector is if there is a substantial policy change after the next Elections. But that would be after the call,” he said.

Despite its apparent complexity, Medeiros said he liked the structure.

“It may not seem easy to understand at first and yet it’s intuitive,” he said.

He concluded saying that he saw three “very attractive” features in the note.

“One is the call after one year with the 18% kicker. The other is the absolute return component. And finally, getting double the return at maturity, and you’re talking unlimited return.

“I like the deal,” he said.

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman, Sachs & Co. LLC is the agent.

The notes settled on Tuesday.

The Cusip number is 40057TX66.

The fee is 0.96%.

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