GS Finance’s $3.01 million PLUS on Stoxx 50: advisers like terms, not index, exposure

By Emma Trincal

New York, Sept. 25 – GS Finance Corp.’s $3.01 million of 0% Buffered PLUS due April 7, 2026 linked to the Euro Stoxx 50 index offer favorable terms, but some advisers are not necessarily keen on getting exposure to European markets.

If the index return is positive, the payout at maturity will be par plus 200% of the index return, subject to a maximum return of par plus 38.6%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index declines by 15% or less and will lose 1% for every 1% that it declines beyond 15%.

“It’s a pure play on non-U.S. stocks,” said Carl Kunhardt, wealth adviser at Quest Capital Management.

“U.S. stocks make for nearly half of global stocks; Europe, about a third. So, when you invest in non-U.S. equities, you invest in Europe by default.”

But Kunhardt said he was not very optimistic about the region.

“Europe is facing all sorts of economic problems. There is a war going on in their backyard. They have a serious immigration problem,” he said.

Singles and doubles

The terms, however, were relatively attractive.

“I don’t hate the note.

“It has a 15% buffer. I check mark positive.

“It has two-times leverage. Again, I check mark on the plus side. One would have to be extremely bullish to take issue with the cap.

“If the euro zone has a good run, you’ll probably hit the cap quickly. But 38.6% is a good cap,” he said.

Over two-and-a-half years, the 38.6% cap is the equivalent of 13.95% per annum on a compounded basis.

Most forecasts assign a lower rate of return for the euro zone, Kunhardt said.

“You don’t want to be greedy unless you’re a broker. For a broker, whose job is to maximize profit, 14% may not be enough. That’s greedy, but if you’re a broker you’re supposed to be greedy.

“As a planner, I manage risk first, profit later. I’m looking at hitting singles and doubles and consistently, not home runs,” he said.

Risk

Despite the attractive structure, Kunhardt said he was “not excited” by the note.

The main reason was the underlying.

“Europe is a very risky area to invest in. Their economies are slowing. Energy costs and inflation are a drag. And the future of the war in Ukraine is impossible to predict,” he said.

High-yield

Another financial adviser said the Euro Stoxx 50 was not his favorite underlying.

“I am not a fan of the Euro Stoxx. It’s the euro zone, blue-chip index, but you only have 50 stocks in it versus 500 for the S&P. Too much concentration probably means greater volatility,” he said.

Yet the volatility was tamed by the sector allocations.

“There isn’t much growth in this index. Industrials and also financials have a greater weight than technology. There’s a reason why you’re getting rich dividends,” he said.

The Euro Stoxx 50 index has a 3.18% dividend yield.

“The terms of the note are pretty impressive, as they should be since you’re giving up a lot of dividends,” he said.

He looked at the downside protection.

“You're getting a 15% buffer. It’s significant on a two-and-a-half year. If it was an 85% barrier, I would never do it. But a buffer like this one with no gearing is very helpful. You will outperform the underlying all the way down,” he said.

Back testing

When assessing a note, this adviser studies the probabilities of return outcomes looking back over several years or decades.

As a proxy for the underlying, he used in this case the price return of the SPDR Euro Stoxx 50, the ETF, which tracks the performance of the index. He measured the past returns based on two-and-a-half year rolling periods going back to 2001.

The chances for the proxy to be negative are 33.2%, he noted. This probability can be broken down between a 14.7% chance of being “covered” by the buffer (declining price of 15% or less) and a probability of 18.5% to breach the buffer threshold leading to losses, which are cushioned by the buffer.

“Whether you lose money or not, you will outperform on the downside and that’s one third of the time, which is a lot,” he said.

On the upside, the area of outperformance was any return below the 38.6% cap. This scenario was likely to occur 42% of the time, he said.

When adding the two buckets, investors can expect to outperform the index 75.2% of the time.

A win

“If you ask me: should I buy the note or the index? I’ll take the structured note over the index hands down,” he said.

“If I can win two out of three times, I am pretty happy. Here you win on the downside, and you win on the upside up to the cap.”

It’s only when the index exceeds the cap level that investors will underperform. But such scenario only has a chance to occur one quarter of the time, he noted.

Even if investors were to be “capped out,” the outcome would still be fair.

“They give me a high enough cap to make me want to take that chance,” he said.

This adviser concluded that investors were being generously compensated for the non-payment of dividends.

“You give up a lot. But you’re getting a lot.

“It’s a really good note if you want to have exposure to Europe,” he said.

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 settled on Sept. 20.

The Cusip number is 40057W4G9.

The fee is 3%.

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