Key Takeaways:
- Structured investments offer customizable risk-return profiles by combining fixed income with an underlying reference asset.
- They can be tailored to specific objectives such as capital preservation, income generation, or upside exposure.
- Term lengths start around six months but typically range from one to five years, with some structures callable before maturity.
- Generally buy-and-hold, with limited liquidity and reliance on issuer repurchase.
Structured investments are financial instruments that combine a debt security – such as a bond or certificate of deposit – with one or more derivatives linked to a reference asset, like an index, ETF, stock, commodity or currency. They are designed to manage risk, generate income, or provide targeted market exposure.
How Structured Investments Work
Structured investments align with investor objectives across four elements:
- Payment Type – Single maturity payment or periodic coupons.
- Protection Level – Full, partial, or contingent protection.
- Term Length – Usually one to five years, sometimes with early call features.
- Underlier – Performance is linked to a reference asset, enabling a specific objective or market view.
Common Structured Investment Strategies
The most common types of structured investments are:
- Market-Linked Notes – A note where the principal amount is invested in a debt obligation of the issuer with returns linked to the performance of an underlying asset.
- Market-Linked CDs – A note where the principal amount is insured by a FDIC bank with returns linked to the performance of an underlying asset. Market-linked notes offer higher returns but carry the credit risk of the issuer.
Structured notes can help investors pursue specific objectives—such as income or growth—or express a market view that complements their overall portfolio:
| Objective | What it Means |
| Income | Periodic coupon payments based on the performance of the underlying asset with some principal protection. |
| Growth | Potential to participate in gains of the underlying asset with full or partial downside protection. |
In addition, different types of protection are offered:
- Full: Principal is returned at maturity (subject to issuer credit).
- Partial: Absorbs some losses up to a buffer; beyond that, losses may match the underlier.
- Contingent: Provides protection unless the underlier falls beyond a set level, after which losses can be one-for-one.
Benefits of Structured Investments
- Potential for Return Enhancement – Upside participation or yield enhancement with downside principal protection. Upside may be leveraged (e.g., >1× participation) or capped, so returns can be limited even in strong markets.
- Downside Protection – Structures can limit losses, aligning with an investor’s risk tolerance.
- Customization – Tailored exposure to specific assets or strategies.
Implementation Insight:
Matching product features —such as coupon type, underlier, and term —to an investor’s outlook and risk profile is critical to aligning expectations with outcomes.
Key Risk Considerations
- Liquidity Risk – Typically buy-and-hold investments; issuers/dealers may not provide liquidity and early sale prices can be discounted due to embedded fees.
- Credit Risk – Principal and coupon depend on the issuer’s creditworthiness and not guaranteed by government insurance (except for FDIC-insured CDs).
- Underlier Dependence – Returns tied to reference assets, which may not behave as expected.
- Complexity & Fees – Structures can be intricate, with embedded costs that affect early sale value.
Implementation Insight:
Always review the offering materials carefully for terms, fees, caps, participation rates, fees, liquidity provisions, and issuer strength.
Hypothetical Example
Goal: An investor wants to grow money by investing in emerging markets but also wants some protection if those markets fall.
Possible Solution: A 4-year note linked to the MSCI Emerging Markets Index.
- If the market goes up, the investor earns 1.5 times the market’s gain (up to a cap).
- If the market falls, the investor is protected from the first 20% of losses.
- If the market drops more than 20%, the investor starts to lose money beyond that point.
The visuals included are hypothetical examples. They do not reflect any specific structured investment and are solely intended to help illustrate how different payment and protection methods work.
Structured Investments: Myth vs. Fact
| Myth | Fact |
| Structured investments are one-size-fits-all | Notes are customizable (term, underlier, protection, payout). |
| They always require taking on full market risk | Protection can be full, partial, or contingent; risk depends on terms. |
| Only equity-linked structures exist | Underliers can include indices, ETFs, single stock, commodities, rates FX. |
