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Structured Notes 101

Structured Notes 101

January 16, 2023
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Structured Notes 101

What are structured notes?

Structured notes are a type of investment product that combines the features of a bond and a derivative. They are created by banks and typically offer a return that is linked to the performance of a specific underlying asset, such as an index, commodity, or currency.

IN PLAIN ENGLISH: Structured notes are investments that provide exposure to a particular index or sector of the market, typically with some level of downside protection and/or upside leverage included.

What are the benefits of structured notes?

Benefits of structured notes include the ability to participate in the upside potential of the underlying asset while also providing some level of downside protection. They can also offer customized investment solutions for specific objectives or risk tolerance.

How are structured notes created by banks?

Banks create structured notes by issuing bonds and using derivatives, typically options, to link the return on the bond to the performance of the underlying asset.

What banks offer structured notes?

Many large banks and financial institutions offer structured notes, including JPMorgan, Citigroup, Goldman Sachs, Morgan Stanley, Barclays, and HSBC.

What accounts can I use to invest in structured notes?

Structured notes can be purchased in Individual and Joint brokerage accounts, IRAs, ROTH IRAs, SEP IRAs, Trust accounts, Donor Advised Funds, and some retirement plans such as Solo 401(k).

Where might it be appropriate to use a structured note in my portfolio?

  1. Increase potential yield on checking, savings, and CDs
    1. Move cash from checking, savings, or CDs into Market Linked CDs or Principal Protected Notes
  2. Build in down-side protection on your market-based investments
    1. Reallocate index fund exposure in retirement accounts into Buffered Growth Notes or Principal Protected Notes
  3. Obtain upside leverage to outperform broad-market indices over intermediate and long-term time horizons
    1. Reallocate cash or index fund exposure in accelerated barrier/buffered growth notes
  4. Have a strategy to make profit in a down market
    1. Invest cash or index fund exposure into a Dual Directional (Absolute Return) note

What are the main risks and considerations with structured notes?

Risks associated with structured notes include interest rate risk, credit risk, and the risk that the underlying asset may not perform as expected. 

How does one manage the risks associated with investing in structured notes?

To manage the risks associated with investing in structured notes:

Diversify note investments across more than one bank to spread out credit risk.

Buy notes across multiple months to manage the timing when your notes mature, and the price of the underlying indices you’re investing in, and spread out interest rate risk.

Work with a financial advisor to ensure you understand the payoff terms and personal considerations with investing in structured notes.