Structured Investments are financial instruments whose performance is linked to that of an underlying asset or assets.
Structured investments are typically comprised of a “bond component” and an “option component”, packaged as one instrument for the investor.
Instruments
The most commonly used instruments in structured investments are certificates of deposit issued by FDIC insured banks and senior unsecured notes of the structured investment issuers. In the case of the FDIC insured CD, the investor is ultimately relying on the credit of the FDIC for repayment, up to the applicable limits, if the issuing bank cannot meet its obligations. With respect to notes, the investor is relying only upon the issuer to fulfill its obligations. The uninsured credit risk associated with notes may result in more favorable structured investment terms as compared with an otherwise similar investment insured by the FDIC.
Performance
The performance of a structured investment is what makes it unique from a direct investment in the underlying asset(s). The performance is characterized by what is often called the “option component” of the structured investment. The structured investment’s performance may replicate the buying and or selling of options with customized and often complex features. These features are meant to tailor the payout to a specific market view and level of risk.
Performance can be characterized in terms of market view (e.g., bullish, bearish, market neutral), degree of principal protection (e.g., full, partial and none) and investment objective (income, capital appreciation, etc.). From the structured investment buyer’s perspective, it is important to bear in mind that no purchase or sale of options takes place, only the purchase of a CD or a note with performance characteristics similar to those of options.
Underlying Asset(s)
The performance of the structured investment is a function of the performance of the underlying asset(s). Some examples of underlying assets are:
- Equities (single stocks, baskets of stocks and indices)
- Interest Rates (individual rates and differentials between interest rates)
- Commodities (single commodities, baskets of commodities and indices)
- Inflation (Consumer Price Index)
- Currencies (single currencies and baskets of currencies)
The Structured Investment: Sum of the Parts
The possible combinations of structured investments are almost as numerous and diverse as the market views and risk/return profiles of the multitude of investors that use them. Generally, for every advantage a structured investment’s performance has (relative to a direct investment in the underlying,) there will be some trade-off that the investor will need to accept. For example, in order to create a principal protected CD linked to an equity index, the investor will typically have to forgo dividends paid on the stocks in the index, in addition to some portion of any appreciation in the index. The key to successfully employing structured investments in an investor’s portfolio is to be able to clearly define the investor’s market view and risk tolerance. The greater the degree of specificity provided, the greater the likelihood that an investor will be able to achieve their objectives with structured investments.
Read more about common risk considerations associated with structured investments.
Financial Professionals
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Please consult your investment advisor prior to investing any money in these or other products. These products are offered through many but not all broker-dealers. This information does not constitute an offer to sell or a solicitation of an offer to buy the securities, nor shall there be any sale of those securities, in any state or jurisdiction in which such an offer, solicitation or sale would be unlawful.