Increases in financial innovation and the advent of the investor class have transformed retail investing. Part of this change stems from developments like structured products. Structured products have existed in the global finance arena for years, but have recently gained more traction in the United States as investors explore different methods for maintaining a diverse portfolio. Discover some of the benefits of structured products and their value for investment planning.
What Are Structured Products?
Structured products developed in part because businesses need to circulate inexpensive debt. These pre-packaged investments usually feature assets connected to interest and an additional derivative. Structured products are registered with U.S. Securities and Exchange Commission (SEC), meaning they operate similarly to traditional investments, such as stocks and bonds. With structured products, the standard payment aspects of conventional security, like the final principal, are replaced with less common payoffs. These payoffs typically stem from one or more of the core assets’ performance instead of the cash flow of the entity issuing the structured product. This design enables investors to form highly personalized risk-return goals.
How Do Structured Products Work?
Structured products consist of two main elements — a zero-coupon bond and an equity option. The zero-coupon bond ensures you receive back the same amount of the structured product’s original value after it undergoes a three-year maturity period. The security option will have an intrinsic value once it matures, provided it exceeds its worth when initially issued. You may be able to obtain a return on investment for the equity, but if you cannot, it will expire and you will only receive a return on the principal. In this way, structured products are priced similarly to traditional investments. However, they may also feature derivatives like forwards and swaps.
What Are Structured Product Benefits?
Structured products help investors in accessing asset classes and additional benefits that might otherwise be unattainable. Consider the following reasons you may wish to choose structured products:
● Increase market access: Investors can explore new markets that they may not find
through domestic options.
● Potentially lead to higher yields: Opting for structured products can result in higher
yields, particularly with sideways markets.
● Fortify capital protection: If you wish to safeguard your capital, structured products
can mitigate risk exposure.
● Lower exchange risk: Incorporating structured products into your portfolio helps you
manage exchange risk.
Other Advantageous Features of Structured Products
Structured products also contain distinct features that allow people to customize their investments. For instance, the rainbow is a structured product that presents investors with multiple underlying assets. With a rainbow note, you can leverage the performance value from several assets that otherwise do not share much correlation.
While much of the American approach to structured products comes from European investing, you can also take inspiration from Asia with the lookback product. With look back products, the final value of a core asset when it expires does not dictate its overall value. Instead, the worth is determined by calculating an average value throughout the investment’s quarterly or monthly term. Adding a lookback to a structured product can yield more consistent returns over time, softening the effects of market volatility.
What Are the Risks of Structured Products?
Despite the various benefits of structured products, investors should be aware that they pose several risks, as well. The following are some areas where structured products can be precarious for investors:
● Market fluctuations: An ever-changing market makes it difficult to confirm adequate
payoff without sufficient knowledge of future conditions.
● Liquidity: The lack of liquidity with structured products, coupled with the ambiguity of
the full return on investment until maturity, makes them less ideal for speedy growth.
● Issuer’s credit: Unlike other securities, structured products or usually not issued
through third parties. Therefore, investors should evaluate the issuer’s credit rating
before purchasing these investments.
● Pricing: No pricing standard exists for structured products, making it challenging for
investors to compare the cost with the price of similar offerings.
Investment Planning with Park Place Financial
If you are interested in structured products but need assistance understanding them better, or simply need guidance with investment planning, turn to Park Place Financial for customized solutions. Our team will analyze your financial situation and leverage data insights and academically validated principles to offer the most informed recommendations for achieving your goals while minimizing risk. We work collaboratively to ensure you access diverse expertise from our certified financial planner and other advisors.
At Park Place Financial, we observe our fiduciary duty to always act in our client’s best interest, meaning you will receive the utmost transparency whenever you rely on us for financial guidance. Contact us today to obtain more investing tips on structured products or to schedule your complimentary financial checkup.
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