Simplifying structured notes is a little like opening up a fob watch movement and understanding how all the cogs, bezels, springs, gears and screws work together to tell the time. It’s much easier to understand that it’s a device for keeping time. In the same way, it’s easier to understand that structured notes offer an additional way to invest and diversify your portfolio while providing an opportunity to hedge risk.
“A structured note is a hybrid security. It combines the features of multiple different financial products into one. They combine bonds and additional investments to offer the features of both debt assets and investment assets.” smartasset.com
Financial securities are commonly used to access specific markets and may be traded to hedge against risk. They can look as elegant and fancy as a vintage fob watch, but they’re complex and require expert knowledge as they operate as both a debt instrument and a derivative instrument.
As Investopedia explains them, all structured notes have two underlying pieces: a bond component (a bond is a certificate of debt issued by a company) and a derivative component (a derivative is a type of financial contract whose value is dependent on an underlying asset, group of assets, or benchmark).
The bond portion of the structured note takes up most of the investment and provides principal protection. The rest of the investment not allocated to the bond is used to purchase a derivative product and provides upside potential to investors. The derivative portion is used to provide exposure to any asset class.
Having structured notes in your financial portfolio allows access to many potential payoffs that are difficult to find elsewhere. Structured notes may offer increased or decreased upside potential, downside risk, and overall volatility.
Nothing in investing is ever certain, market risk is prevalent in all investments, and structured notes have pitfalls. Some of them have principal protection, but it’s possible to lose some or all of the principal amount if they don’t. This risk arises when the underlying derivative becomes volatile and can happen with equity prices, interest rates, commodity prices, and foreign exchange rates.
At Victus Group, we only use structured notes when we know it fits well within your investment philosophy and financial planning needs and passes our due diligence. Investing is about growing wealth, not gambling, and we handle every client portfolio with the care and attentiveness it deserves.