GS Finance’s $29.43 million notes on Dow Jones U.S. Select Dividend show rarely used index

By Emma Trincal

New York, Feb. 4 – GS Finance Corp.’s $29.43 million of 0% leveraged buffered notes due Jan. 31, 2025 linked to the Dow Jones U.S. Select Dividend index showed a first use of this underlying index in a registered note, according to data compiled by Prospect News.

If the index return is positive, the payout at maturity will be par plus 122.37% of the index return, according to a 424B2 filing with the Securities and Exchange Commission. If the index falls by up to 20%, the payout will be par plus the absolute value of its return. Investors will be exposed to losses of the index beyond 20%.

The Dow Jones U.S. Select Dividend index tracks the performance of 100 high dividend-paying stocks trading in the United States, according to the prospectus. It was launched on Nov. 3, 2003.

The index dividend yield is 3.6%, twice more the 1.71% dividend yield offered by the S&P 500 index.

Rare underlier

Issuers employ high-paying dividend indexes to boost the terms of structured notes since noteholders have to forgo dividend payments. The unpaid return is used to purchase options.

While the Euro Stoxx Select Dividend 30 index has often been used as an underlier, especially recently, its U.S. counterpart appeared to have made its first appearance in a U.S. registered note with this product, the data showed.

The index however has been the underlier of other structured products.

In May 2012, UBS AG London Branch issued its ETRACS Monthly Pay 2xLeveraged Dow Jones Select Dividend index exchange-traded notes. The ETNs trade on the NYSE Arca under the symbol “DVYL.”

Some banks have issued market-linked certificates of deposits tied to the Dow Jones U.S. Select Dividend index, such as BMO Harris Bank.

First Trust Portfolios LP has registered unit investment trusts linked to the same index.

Trade-off

“A 3.6% dividend is a high yield to give up. But at the same time, the 1.22x leverage helps compensate for it,” said Tom Balcom, founder of 1650 Wealth Management.

“I like the concept of an absolute return note on a buffer.

“Five years is a long time. But you do have the leverage and no cap. If there’s a pullback, you get the buffer and the absolute return. These are all favorable.”

Conservative play

This adviser is more interested in capital preservation at this stage than “chasing returns,” due to the current market environment.

“We’re at all-time highs. If we were in December 2018, I may want more leverage. But now I’m inclined to play defense,” he said.

If Balcom had to modify the terms, he would leave the leverage factor as it is.

“The leverage is fine. But I’d rather have half of the absolute return participation for a deeper buffer, maybe 25% to 30%,” he said.

Value-oriented

Donald McCoy, financial adviser at Planners Financial Services, also liked the structure for its dual directional and protective features. Its simplicity was just as important.

“The nice thing about it is that it’s pretty straightforward. There isn’t a whole lot of moving parts.

“It’s not one of those worst-of. You’re tracking a specific index, not two or three.”

The index components are not high-growth stocks. But the purpose of the notes is to offer a hedge.

“It’s a bucket of large value stocks... Mostly utilities and bank stocks.... By definition, when you have high-dividend stocks, that’s what you’re getting, not biotech or internet stocks.”

Utilities, financials and consumer goods make for 54% of the index portfolio, according to S&P Dow Jones Indices, the index sponsor. Utilities alone represent more than 26% of the total.

Even if you don’t get this high-dividend yield, the leverage keeps the investor from missing too much of it.

Non-directional outlook

“The protection given from the hard buffer is significant,” he said.

“If the market crashes and falls by 35%, you’re down 15%.

“If it’s down 15%, with the absolute return you’re magically up 15%.

“Given today’s valuations, a 20% buffer with the absolute return and the kicker on the upside is pretty nice.

“For people modestly bullish to modestly bearish, this is a pretty good product.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the underwriter.

The notes (Cusip: 40056YCU6) priced on Jan. 28 and settled on Jan. 31.

The fee is 4.1%.

© 2015 Prospect News.
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