Structured notes are a financial securities product with a return which is based on a number of elements. The return is linked to assets and indexes and they have a fixed term maturity date.
What are structure note returns based on
The growth potential of structured notes is based on a number of things which includes:
- Basket of equity securities
- Interest rates
- Equity indexes
- Single equity security
- Commodities
- Foreign currencies
They have two components; a bond and an embedded derivative.
Different kinds of structured notes
A structured note isn’t a one size fits all product. When sold to individual investors the different kinds include:
- Principal protected notes
- Reverse convertible notes
- Enhanced participation notes
- Hybrid notes with a number of characteristics
Complexity
A structured note product should always be selected with the help of an experienced financial advisor. It’s vital that you understand each element involved as they can be quite complex.
Working with a specialist will mean that you can learn about the assets, indexes and the note payoff structure. The payoff calculation may also not be straight forward as it will include multiples of the performance of the asset or index, the inclusion or otherwise of protection from any asset losses and the fees of the product which also means liaising with experts is a wise move.
Questions to ask
If you’re considering a structured note as part of an investment portfolio, here are the questions to ask:
- What are the fees and costs involved at all stages of this investment?
- How do I know this is appropriate for me?
- How long will my funds be tied up?
- Can I sell my investment before the maturity date and if so, will I incur penalties?
- How does the payoff structure work?