In a world where investors are constantly looking for new ways to invest, structured products could be exactly what they are searching for. Whereas equities are usually tied to the performance of a company or index and bonds have specific rates at which they are paid out, structured products tend to have more flexibility in both their risk and return profiles.

A structured product does not necessarily have a single definition as far as features. Most commonly they involve a package of investments containing some combination of equity, fixed income, and derivatives instruments.

What Does a Structured Product Consist of?

Not every structured product is built the same. They are fully customizable investments that are tailor-made to reach the goals of investors. With that said, they often contain three main components.

1. Fixed Income

This aspect of the product could be bond, collateralized debt, or some other fixed-income product. The idea of the fixed income component is to generate income which is then used to purchase the “derivative” component of the structured product.

2. Underlying Asset

In a structured product, the underlying asset is most often an index fund, an ETF, or any other equity that is traded on the stock market. The goal of this asset is to provide “performance” that will provide a return over the interest rate to the investor.

3. Derivative

A derivative in the case of a structured product is most often an option contract. The derivatives are linked to the underlying asset in step 2. The derivative is what determines how much return the investment will get. The derivative choice will vary depending on risk tolerance, desired rate of return, and more.

Benefits of Structured Products

Compared to traditional investment products, structured products present a few main benefits:

• Capital Protection – depending on the product chosen, the structured products can offer some level of protection to investors and can be used to minimize risk
• Gains during flat markets – structured products are often able to provide sizable gains even when the market is trending sideways
• Access to different markets – structured products can provide investors with access to markets they may not be able to access using traditional investment strategies
• Defined maturity date – investors know the timeframe for the products, providing them peace of mind and the ability to plan

Types of Structured Products

Being that structured products are customized and built by individual banks, there is not a one size fits all category of them. However, there are a few strategies that are commonly used:

1. Capital Protection Product

These products do not provide the sizable returns to investors; however, their risks are minimized and the rate of return is often guaranteed to be a certain rate by the maturity date of the product.

2. Yield Enhancement Product

These notes are somewhat opposite of the capital protection notes. The return of these products will often be much higher, however, the risk is higher as well because the return is based on performance of the underlying instruments.

3. Absolute Notes

An absolute note is somewhat of a combination of the above two. These notes allow the investor to experience gains correlated to the underlying security while still minimizing the risk similarly to the capital protection products. The key is that the upside allowed is usually capped as is the potential downside, preventing massive swings in either direction.

Please note, none of the information on this blog represents the opinion of my employer and all information does not represent a financial advice.

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