GS Finance’s leveraged buffered notes tied to S&P 500 index designed for mildly bullish play

By Emma Trincal

New York, Nov. 27 – GS Finance Corp.’s 0% leveraged buffered notes due Dec. 15, 2020 linked to the S&P 500 index provide a different risk-adjusted return for investors who believe the market will not rise significantly over the next two years, advisers said.

If the index return is positive, the payout at maturity will be par plus two times the index gain, up to a maximum return expected to be between $1,220 and $1,250 per $1,000 of notes, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index finishes flat or falls by up to 10% and lose 1% for each 1% index decline beyond the 10% buffer.

Cap eyed

“I think this note is quite reasonable,” said Kirk Chisholm, wealth manager and principal at Innovative Advisory Group.

“Getting a 25% gain over the next two years is not out of the realm of expectations.

“If the market doesn’t go up that much you can still achieve the double-digit return. It’s not hard to get the maximum return with two-times leverage.”

A cap set at 25% means that the top return may be earned if the S&P 500 index rises by only 6.1% a year. Investors in this scenario can expect to earn 11.8% a year on a compounded basis.

On the lower end, a cap priced at 22% would generate a 10.45% annual compounded return and would be achieved if the S&P 500 index was up 5.35% a year.

Range bound issue

“You’re not getting the dividends. If the market is flat, that would be a problem. I guess that would probably be the main issue.”

But Chisholm said he does not expect the market to be flat during the next two years.

“I think we’ll see a lot more ups and downs, a lot more volatility,” he said.

“With the 10% buffer you can at least mitigate some of the risk.

“This is one of the most reasonable ones I’ve seen in a while.”

Moderately bullish

Jonathan Tiemann, president of Tiemann Investment Advisors, LLC, said the notes would be appropriate for modestly bullish investors seeking some downside protection as an alternative to an outright investment in the index fund.

“If you believe that the index can go up some but not a lot, this might be a better way to get the exposure than buying the underlying itself,” he said.

“You’re basically giving away returns over 22% or 25% to get a slightly different payoff.

“If you think the S&P will drift a little bit higher you might like this better than buying the underlying. You get a little bit of protection on the downside in case you’re wrong.

As with most structured notes the product was a reflection of the investor’s outlook.

“If the market is flat or down a little bit, you’re OK.

“If it’s up a little bit, you’re better.

“If it’s up a lot, you’re sorry.

“And if the market is down a lot, you wish you might have a way to get out. But you’re still better off than holding the position long.”

The notes will be guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. is the agent.

The notes will price on Dec. 10.

The Cusip is 40056EHS0.

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