In plain English: a structured product is a pre packaged investment that combines a bond or deposit with a derivative, so it can deliver a defined return linked to a market such as an equity index, usually with a set level of capital protection. That single sentence answers what is a structured product, and the rest of this page explains it properly.
Structured products are among the fastest growing investment classes in global finance. The name “Structured Products” comes from the fact that such products are created by combining traditional investments (usually a fixed income instrument such as a bond or a note) with financial derivatives (usually an option). Such “structuring” allows the resulting products to achieve specific risk-return profiles to match the investors’ needs and expectations that cannot be met by traditional investments.
Structured products are unsecured debt securities of the issuer. They are commonly backed only by the issuer’s promise to make good on the intended payouts. Contrary to popular belief, they are NOT equity securities, and holders of these products are not entitled to share the issuer’s profits. The fact that the intended payouts from structured products may be based on equity price movements does not make them equity securities. Structured products are also referred to as hybrid products, because it is possible to mirror equity-like (or other asset classes) returns using a fixed income structure.
What is a structured product made of? The two components
Almost every structured product is built from two parts working together.
The first part is the bond or deposit element. Most of your money goes here, into a fixed income instrument issued by a bank, and its job is to grow back towards your original capital over the term. This is what makes a defined level of capital protection possible.
The second part is the derivative, usually an option. A smaller slice of your money buys exposure to an underlying market, such as an equity index or a basket of shares. This part generates the growth or income, and it lets a structured product target a specific risk and return profile that a plain bond cannot.
Common types of structured product
Structured products come in several familiar shapes. Most sit in one of the following groups.
- Capital protected. These aim to return all, or a defined percentage, of your original capital at maturity, while still giving some exposure to market growth. You can read more in the basic guide to capital protected investments.
- Income or coupon. These pay a regular coupon, either fixed or conditional on the underlying market staying above an agreed level.
- Participation or growth. These have no fixed coupon and instead give you a share of any rise in the underlying market, sometimes at an enhanced or leveraged rate.
- Autocall. These can mature early and pay out on set observation dates if the underlying market meets a defined condition. Our guide on how an autocall works covers this in detail.
Pros and cons of structured products
Structured products can be useful, but they are not right for every investor. It helps to weigh both sides.
Advantages
- A defined, known outcome at the outset, rather than an open ended one.
- The option of a defined level of capital protection, explained in how structured products protect against market fluctuations.
- Access to markets and payoff shapes that are hard to build from ordinary investments.
- The ability to earn a return in flat or modestly falling markets.
Disadvantages
- Issuer credit risk. A structured product is an unsecured debt security, so if the issuing bank fails you could lose money even when the underlying market performed well. This is the single most important risk to understand.
- Capped upside. Many structures limit how much you can make, so you may not capture the full rise of a strong market.
- Limited liquidity. They are designed to be held to maturity, and selling early can mean an uncertain price.
- Complexity. The terms need reading carefully, which is where an Adviser adds value.
Who structured products suit
Structured products tend to suit investors who have a clear view on a market over a set term, who value a defined outcome, and who are comfortable holding to maturity. They are frequently used by Advisers and Wealth Managers to shape a specific risk and return profile within a portfolio. They suit less well anyone who may need instant access to their money, or who wants uncapped exposure to a rising market. For a fuller overview, see our introduction to structured products.
Frequently asked questions
Are structured products safe?
No investment is entirely without risk. A capital protected structured product can return your original capital at maturity, but that protection depends on the issuing bank being able to pay, so issuer credit risk remains.
Can I lose money in a structured product?
Yes. You can lose money if the issuer fails, or, in structures without full protection, if the underlying market falls below an agreed level. Reading the terms before you invest is essential.
How long do structured products last?
Terms vary, but many run for three to six years. Some, such as autocalls, can mature early if market conditions are met. They are intended to be held for the full term.
Who Uses Structured Products?
- International Financial Advisor
- Asset Managers
- Wealth Managers
Structured products are not an asset class in their own right, but can be used as an alternative to a direct investment in traditional asset classes, especially in markets where direct access is restricted. For example, when a market is closed to foreign investors, structured products may be the only way to replicate the performance of that market, without directly investing in securities of that market.
Structured products can offer access to exotic asset classes typically out of reach for individual investors. They are extremely versatile, and can be tailor-made to deliver a specific risk and return profile to suit the investor’s needs, such as leveraged returns, a defined level of capital protection, or conditional capital protection, each depending on the issuer meeting its obligations.
Structured products can also be used as part of the asset allocation process to reduce risk exposure of a portfolio.
Why Invest in Structured Products?
We believe that Structured Products offer many attractive features which can be used to satisfy a number of investor needs and investment goals. As with any investment, these features carry risk, including issuer credit risk and the possibility of capital loss.
How do NEBA Financial Solutions play a role in providing structured products?
NEBA Financial Solutions are experts in product design. We research, build, and distribute high quality Structured Notes for our clients. Our comprehensive Menu of Notes can help you and your clients explore options that may suit their objectives. Our team is also on hand to help you create Bespoke Notes to suit your clients’ investment attitudes and requirements.
Register with us to access NEBA’s full range of products, tracking reports and market updates for all your NEBA investments today or contact us at info@nebafinancialsolutions.com to obtain more info. We’ll be more than happy to help you out!
Visit www.nebafinancialsolutions.com to see our Structured Products and UCITS Funds
