Goldman’s leveraged buffered notes tied to S&P 500 offer good timing for uncertain times

By Emma Trincal

New York, Dec. 24 – The holding period of GS Finance Corp.’s leveraged buffered notes due Jan. 6, 2022 linked to the S&P 500 index offer a good compromise between short and intermediate term, buysiders said.

Three years goes beyond the Presidential Elections and Wall Street strategists’ calls for a recession in 2019-20.

Yet the notes are short enough to satisfy the liquidity needs of some investors who are reluctant to tie up their money for too long, they noted.

A compromise

The payout at maturity will be par plus triple any index gain, up to a 25% to 28% cap.

Investors will receive par if the index falls by up to 15% and will lose 1% for each 1% decline beyond 15%.

Timing

Michael Kalscheur, financial adviser at Castle Wealth Advisors, said he liked the cap, even on the lower end of the range at 25%. This adviser in general tends to look at longer-dated notes. However, he still sees chances of a rally in the next year.

Kalscheur’s main motivation behind purchasing longer-dated notes for his clients is two-fold: having them stick to a rewarding buy-and-hold discipline and getting better terms on the products.

But things have changed over the past weeks with the market turning increasingly volatile. This adviser is now in the opinion that most gains could be had in the next 12 months. He noted that such view was his personal opinion and that the market proved him wrong several times before, which is why he continues to prefer buffers over barriers and protection over nothing.

A note that provides a 15% buffer and a medium-term maturity seemed like a good compromise in this uncertain and volatile environment, he said.

Balanced structure

Many advisers given the current sell-off said they would rather keep the notes to either a one-year or a five-year term in an effort to avoid what they believe will be the next bear market.

But Kalscheur’s views are mixed. He sees the U.S. economy as still very strong. He believes that growth will persist.

What caught his attention in this product was the combination of a high cap and protective buffer.

With a 15% hard protection and even discounting the unpaid dividends, investors are guaranteed to outperform on the downside, he noted.

The annual cap in the higher single-digit range is acceptable if the bull run slows down. With 3x leverage, it becomes easier to achieve the top return as it can be earned with a 3% annual increase in the S&P 500 index.

Protection

Jerry Verseput, president of Veripax Financial Management, said he also liked the notes.

He also prefers to invest over longer periods of time – in the five-, or even six-year range. But with this note the terms were attractive even on a three-year tenor. Some investors might consider a three-year note as too long. Verseput disagreed.

“If you think that a three-year holding period is too long, you shouldn’t be in equities to begin with,” he said.

He also liked the 15% buffer in the current market turmoil.

“If the market is down 30%, you cut your losses in half. Not bad,” he said.

Caution

There is a lot of talk about a recession or even a bear market, advisers noted. Even if the fundamentals of the economy remain strong, according to many of them, caution is required in light of emerging warning signs from the stock market, crude oil prices at record lows, volatility spikes and global growth slowing down.

Both advisers said they liked the combination of a good protection and bullish upside for the time period.

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the underwriter.

The notes will price on Jan. 2.

The Cusip number is 40056EHD3.

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