A Beginner's Guide to Structured Products

One of the primary goals of any investor is to develop a diversified strategy that ensures long-term returns while lowering short-term volatility. Some assets will naturally perform better than others, particularly during times of market uncertainty.

As there is no such thing as a “one-size-fits-all” approach, it pays to examine lesser-known instruments. This is why we have taken a closer look at structured products. Whether you are an experienced investor or you are new to this field, structured products represent an important facet of the equation.

What exactly are structured products? What characteristics make these options attractive? Are you curious to learn about some of the benefits that they can offer? If so, read on.

From general overview to the relationship between risk and reward, you will soon be equipped with the knowledge required to make an informed decision. Regardless of your goals or the need for a bit of buoyancy, the information outlined below will come in handy.

Structured Products: a Brief Overview

Structured products are often referred to as prepackaged investments. These contracts are primarily intended to provide diversification while also addressing an individual's risk tolerance. Although the underlying details can vary, they are normally tied to the performance of an existing asset (such as a stock, a basket of stocks, an index, or a commodity). These products can be grouped into three general categories:

• A holding that ensures a fixed rate of return while providing limited exposure to the marketplace (principle-protected notes).
• A position providing higher interest rates and capped overall returns. This is often known as a yield-enhancement product.
• A product that can be sold early if its price crosses a specific threshold.

Structured products may also be tied to a specific index, addressing an investor's risk-reward appetite. Let's now summarise these observations before moving on. Structured products can provide diversification, protect capital, and balance a portfolio. They may also be employed to hedge against volatility while offering innovative features (such as above-market interest rates).

What are the Advantages of Structured Products?

Now that we have a basic understanding of structured product mechanics, it's worth highlighting a few key attributes.

Relative Stability

The most obvious benefit of a structured product is the stability it can provide. Many are designed to protect the initial capital while offering predictable returns. This is why they may be ideal for individuals who wish to mitigate risk or augment their existing holdings with greater stability.

Customisation

Seasoned investors will likewise turn to structured products due to their flexible nature. The type of underlying asset, maturity (the length of time the product needs to be held), and the rate of return are three common metrics. This is why it's important to compare structured products to appreciate the variety of options at your disposal.

A Predictable Rate of Return

Structured products will offer long-term returns that are predictable and (in some cases) guaranteed. It is nonetheless important to stress that this rate depends on the type of product and the contractual agreement.

A Welcome Addition

We can now see why many wealth managers recommend including structured products within any portfolio strategy. Not only can these assets provide a reliable rate of return, but they are also excellent ways to mitigate risk. This is even more relevant given the current marketplace.

Although no investment is completely immune from fluctuations, structured products have certainly earned their keep. As the expression goes, variations in the thread strengthen the weave.