Exploring Structured Products and Their Benefits

Introduction

Structured products are an effective tool in navigating financial markets due to the flexibility they offer investors. Structured products provide an opportunity to gain exposure to a wide range of underlying instruments and can be utilized to meet an array of needs or objectives.

What is a structured product? Structured products are investment instruments created through complex combinations of assets so as to offer various levels of risk, return, and liquidity profile. These products can incorporate multiple asset classes, such as stocks, bonds, index options, and futures with the goal of trying to deliver a better return in comparison to a single asset. Structured products can be found in a variety of financial markets and can be tailored to meet a range of investment objectives.

Benefits of utilizing structured products include:

• Flexibility for investors with the combination of multiple asset classes
• Potential for higher returns than what can be achieved through single asset classes
• Ability to manage risk through diversification
• Tailored products to meet specific objectives

Types of Structured Products

Structured products are attractive investments because they help investors to leverage their capital and generate attractive returns by mitigating market risk. Structured products can be categorized in several different categories based on the strategy being employed.

Leveraged

Leveraged structured products help investors to leverage their funds and leverage investments with a higher risk/reward ratio. These structured products utilize a leveraged strategy in order to generate returns. Leverage can be beneficial if used correctly and investors should understand the risks associated before jumping into these types of products.

Capped

As the name implies, capped structured products are intended to provide some degree of downside protection. In comparison to leveraged products, they typically have a lower risk/reward ratio as they set a maximum return that an investor can receive, regardless of market movements.

Rebate

Rebate structured products are designed to give investors an income stream, typically without exposing the investor to underlying investments. These products often have annual payments, but the coinvestor will end up paying for the investment over time, as the rebate payments are share out of the gains earned from the underlying investments.

3. How Do Structured Products Benefit Investors

Structured products are structured or packaged investments created by an issuer, and are based on underlying assets that can range from stocks, bonds, options and commodities, to combinations of these assets. Structured products are created to provide volatility protection and also offer unique opportunities for capital appreciation and income.

a. Risk Mitigation

Structured products provide investors with a way to mitigate their risk since it combines a higher yielding component with one that offers protection, such as an option. For example, the investor can buy a structured product with a participation rate which provides them exposure to the underlying asset but also provides a downside protection component. When downside protection is incorporated, it is safer and more suited to uncertain market conditions where volatility is high.

b. Portofolio Diversification

Structured products can also provide investors with portfolio diversification since they offer access to a range of different asset classes. This can help to reduce the portfolio’s overall risk and can provide investors with exposure to different sectors, countries and regions. Different structured products can offer different opportunities for diversification depending on their high yielding component and their options component.

c. Capital Appreciation or Income

Structured products can provide investors with capital appreciation or income depending on the type of underlying assets and the structure of the product. For example, investing in a structured product with a high yielding component can result in regular income payments and capital appreciation if the underlying assets appreciate in value. Alternatively, a structured product with a lower-yielding component can provide lower returns but with less risk.

What are the Issues with Structured Products?

Structured products are complex investment instruments designed to yield higher returns than traditional investment vehicles. While these products can offer attractive investment opportunities, there are certain issues associated with them that should be considered before investing.

High Expense Ratios

Structured products can carry high expenses, with some products having an annual expense ratio greater than 1 percent. This is higher than most mutual funds, exchange-traded funds (ETFs), and other traditional investments, and can significantly reduce the potential returns generated from these products.

Complex Investment Instruments

The investment instruments associated with structured products are often complex and can be difficult to understand. This can make it difficult to accurately assess the risks associated with investing in these products, leading to potential losses if the investor does not have a proper understanding of the product.

Risk of Issuer Default

Structured products are debt instruments issued by financial institutions, and have the risk of issuer default. This means that if the issuer is unable to make payments, the investor can lose all or part of their investment.

It is important to be aware of the potential issues associated with structured products before investing. Understanding the expenses and risks associated with these products can help ensure that an investor makes an informed decision when evaluating these products.

How to Choose the Right Structured Product

Structured products can be a great way to invest, as they offer attractive investment opportunities coupled with some of the advantages of traditional funds. However, to get the optimal return, you need to make sure you choose the right product for your needs. Let's take a look at some tips to help you select the most suitable solution for your financial objectives.

Understand Costs and Risks

Always analyze the associated costs and make sure you understand the associated risks before investing in any structured product. Structured products can have different levels of risk associated with them, from high to low, and it's important to be aware of which level of risk you are taking. Additionally, make sure that you don't get caught up in the potential reward and forget to factor in the potential costs.

Start Small

When getting started with structured products, it may be worth beginning with small investments. This will give you a chance to get used to investing in these products before committing more of your capital. This can also help you to gain the experience to understand the varying levels of risk and return, which will help you to make more informed decisions moving forward.

Use Structured Product as a Portfolio Building Block

Structured products can be a great option for diversifying your portfolio while still offering access to potentially lucrative investment opportunities. Consider blending structured products with lower risk investments such as bonds and ETFs in order to spread and reduce your risk exposure. Try to mix investments from different sectors and come up with a portfolio that best meets your financial objectives.

Professional Guidance

Structured products are powerful instruments that can be used to enhance the performance of an existing portfolio. While they have the potential to deliver increased returns, they also come with risks. Understanding what the various structured products contain, researching them thoroughly and using sound judgment is essential.

However, professional financial guidance is always recommended when making decisions about your investments. One way to get that guidance is to use a financial planner.

Seek Professional Financial Advice

When it comes to investing in structured products, professional financial advice can be invaluable. Professional financial advisors have a deep understanding of the market, access to relevant resources and the ability to explain product details in an understandable way. They can help you to properly assess the risk and expected return of different structured products and determine which product best meets your needs.

Use a Financial Planner

Finding the right financial planner is key for success. An experienced financial planner should have both the expertise and your best interests at heart. When selecting a financial planner, do your research and find someone who is a CFP® who embraces the fiduciary standard. This means they will act solely in your best interests.

When discussing structured products with a prospective financial planner, ask questions to ensure they are well versed in this type of investing. Questions to ask might include:

• What experience do you have with structured products?
• How do structured products fit into your overall strategy for my portfolio?
• What are the risks associated with structured products?
• What type of returns can be expected from structured products?

With the right advice and guidance, structured products can be a powerful addition to your investment portfolio. Be sure to carefully research and evaluate any and all financial planners prior to selecting one to ensure they strive to offer you their best advice.

Conclusion

An understanding of structured products is essential for both professional investors as well as individual investors who are looking to diversify and protect their portfolios. Structured products combine the advantages of other traditional investments with more advanced strategies, allowing investors to easily spread their risk across different asset classes to generate the desired return.

Key Takeaways

• Structured products offer an attractive way to spread risk due to their versatility and customizations.
• You can create tailored investment strategies using a combination of traditional asset classes, fixed income instruments and derivatives.
• Structured products provide investors with liquidity, low transaction costs, and allow for diversification.
• Understanding the underlying asset classes, the risks associated with them, and the different types of structured products available will help investors become better prepared to use them.

Summary of Structured Products

Structured Products are a great way for investors to diversify their portfolio and take advantage of potential growth opportunities in different asset classes, while also minimizing their risk. These customized investment strategies can provide tailored solutions to meet the specific needs of investors and can be used to generate returns that might not be achievable through more traditional investments. Understanding how to use these investments properly, and how to measure and monitor the risk associated with them, is essential for any investor who is considering utilizing structured investments.