| RETURNS OF THE STOCK MARKET PLUS DOWNSIDE PROTECTION: TOO GOOD TO BE TRUE? |
| 2022 and the start of 2023 have been challenging as investors have been scrambling to find ways to protect their investments and make money. One silver lining on the horizon has been Market Linked Notes (MLN). MLNs are one of the best-kept secrets of the investment world. They are a type of hybrid stock and bond investment that can provide the upside of the stock markets while providing partial or full downside protection when held over the term of the note. Market-linked notes are issued by major banks, such as Goldman Sachs, Morgan Stanley, etc., and are typically linked to the performance of a specific market index, such as the S&P 500. They are available for terms of 1 year to 7 years and provide different levels of downside protection in case of a drawdown in the market. They can be an effective investment class in times of volatility. Additionally, with notes that provide 125% or 150% of the market returns, over a period of time such as five years, the upside can be particularly attractive. Market Linked Structured Notes have been around for over 30 years but there is still little awareness regarding them. While building up a solid portfolio of MLNs requires some amount of research and reading the fine print carefully for features and limitations, they can be a valuable tool in generating returns while limiting risk in an investment portfolio. These instruments are available through brokerages such as TD Ameritrade and Charles Schwab which consolidate offerings from banks every month. Example of an S&P 500 Buffered Market Linked Note: We look at an example of a five-year market-linked note released in February 2023 (Table below). It carries a participation rate of 150%. So if the closing level of the S&P 500 after 5 years is 50% above the initial level, the payout will be 75% plus the initial capital ie 175%. On the downside, the note has a buffer of 20% that is if the markets are down by 20% or less, the investor will get their principal back. A further decline of 1% below 20% will result in a loss of 1%. Market Linked Buffered Note Issuer: Goldman Sachs Finance Maturity: 5 Years Underlying Index: S&P 500 Participation Rate: 150.00% Downside Buffer: 20% |
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| Notes come in all flavors and varieties. They can be fully guaranteed ie total return of capital, or they can have limited downside. Returns can be based upon different indexes, some are broad while others can be fairly specialized. Some are callable generally with some guaranteed minimum return. Notes might not pay dividends. The maximum returns can be unlimited or capped. In the example above, the note is callable by the issuer with a guaranteed return of no less than 7%. The total return over 5 years is uncapped. MLNs offer investors the potential for higher returns than traditional fixed-income products, as well as the opportunity to participate in the performance of the underlying market. Different types of notes can be incorporated into investment portfolios geared toward growth, capital preservation, and income generation, with a judicious balance of reward and risk.* It is important to note that the return on an MLN is not guaranteed, and the value of the investment can fluctuate based on the performance of the underlying market. The above is for informational purposes only and is not meant as an offer for purchase. Marketing notes are complex financial products. It is important to understand the risks involved before investing in an MLN. Investors should consider their investment, goals, risk, tolerance, and investment horizon, and consult with their financial advisor to determine if this type of investment is appropriate for them. |
