How and Why Structured Investments are Used Within a Portfolio to Pursue Growth Objectives
Growth-oriented structured investments are typically used to achieve consistent market exposure, with embedded protective features that can provide a degree of risk management in a portfolio. Other times, and still on the growth side of the portfolio, structured investments can be used to try to capitalize on a specific market outlook (bullish or bearish) or to gain efficient, risk-tailored exposure to strategies that may be difficult to access directly.
Growth investors considering any structured investment should do the following:
- View structured investments as buy-and-hold strategies whose payouts are not promised until maturity.
- Understand there is no guaranteed secondary market and that while issuers have historically bought back structured investments, they are under no legal obligation to do so.
- Be comfortable with the issuer’s creditworthiness since payments made by structured investments are subject to the credit risk of the issuer.
What do growth-oriented solutions look like in the structured investment world? A high-level overview can shed some light:
Growth solutions:
- Enable investors to participate in the potential growth of a desired market, often with some risk mitigation.
- Are generally characterized by a single payment at maturity.
- Are tied to the return of an underlier, such as an equity index, a basket of indices or a stock.
- Can offer full principal protection, partial protection, or no protection at all.
Highlighted below are a few hypothetical scenarios to show structured investments can be used to achieve growth objectives.
Growth Use Case #1: International Exposure, With a Degree of Protection
The objective: An investor seeks the potential growth and diversification that may come with international equity exposure. She is optimistic about emerging markets specifically, and comfortable with equity risk. However, she would appreciate some downside protection should those markets experience a slight to moderate decline.
A potential solution: A market linked growth note with upside participation tied to a broad emerging market equity index, along with barrier protection.
This type of note can be visualized in the below hypothetical illustration:
Underlier: MSCI Emerging Markets Index
Term: 4 years
At maturity, an investor would receive a return that is 1.5x any gains in the index, uncapped, on a price return basis.
At maturity, the barrier would absorb the first 20% of any losses in the index but after that, protection would disappear, and losses would be one-to-one from the index’s initial level.
In other words, if the index is at 80% or above of its initial level at maturity, an investor would receive his or her full principal back. However, if the index is below 80% of its initial level at maturity, an investor would take losses from the index’s initial level.
Benefits:
- Leveraged and uncapped participation in any gains in the underlier at maturity.
- Return of principal, so long as the underlier has not declined below the barrier at maturity.
Considerations:
- Leveraged and uncapped participation in any gains in the underlier at maturity.
- Return of principal, so long as the underlier has not declined below the barrier at maturity.
Example #2: Expressing an Investment View
The objective: An investor follows the market closely and feels that over the coming 18 months U.S. equity returns may be more muted, or even slightly negative (he expects single-digit returns, either positive or negative). He wants to remain engaged in the markets, but also somewhat protected if market gains do not continue.
A potential solution: A market linked growth note that offers exposure to U.S. equities with the potential for a return regardless of whether market performance is positive or negative, and a degree protection against a market decline.
Underlier: S&P 500 Index
Term: 18 months
At maturity if the underlier has increased, an investor would participate in any gains in the underlier up to a pre-determined maximum return of 15%.
If the underlier has declined but is at or above 90% of its initial level, an investor would receive an absolute return payment in the amount of the decline.
At maturity, the barrier would absorb the first 20% of any losses in the index but after that, protection would disappear, and losses would be one-to-one from the index’s initial level.
In other words, if the index is at 80% or above of its initial level at maturity, an investor would receive his or her full principal back. However, if the index is below 80% of its initial level at maturity, an investor would take losses from the index’s initial level.
Benefits:
- Upside participation (up to a cap) in any gains in the underlier.
- Payment even if the underlier return is negative, as long as negative return is not below the hard buffer level at maturity.
Considerations:
- The hard buffer only protects principal against a degree of decline in the underlier; losses could be significant.
- The underlier’s return is based on price return only and does not include dividends.
Informed Investing
Structured investments come in a wide variety with different terms and conditions. There’s one for almost any market outlook or investment goal, giving investors the chance to stay in the market and choose how much protection they need to feel comfortable.
When considering any structured investment, investors should understand the type of protection it offers, if any, as well as its payout potential, by carefully reviewing the offering documents before investing.
Structured investment products and services may be offered through SIMON Markets LLC (“SIMON”). SIMON is a registered broker/dealer, member FINRA and SIPC, and is affiliated with iCapital, Inc. and its subsidiaries. Please see the disclaimer at the end of this document for more information about these entities.
Please contact your financial professional or a fund manager to learn more.
IMPORTANT INFORMATION — DISCLAIMER
STRUCTURED INVESTMENTS ARE CONSIDERED COMPLEX PRODUCTS AND MAY NOT BE SUITABLE FOR ALL INVESTORS.
This material is intended as general background information, for educational purposes only, and this material should not be used as a primary basis to make an investment decision. The material provides a general overview of the products described, and actual financial instruments may differ materially from those described. No person should consider investing in an instrument on the basis of these materials. Any investment decision should be made only after carefully reviewing the applicable prospectus. Please remember that all instruments described in this material involve a risk of loss. This does not constitute legal, accounting or tax advice, and the recipient should consult with his or her legal, accounting or tax adviser regarding the instruments described in this material.
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Please note that there is no public secondary market for structured investments. Although the issuer may from time to time make a market in certain structured investments, the issuer does not have any obligation to do so and market making may be discontinued at any time. Accordingly, an investor must be prepared to hold such investments until maturity. Any or all payments are subject to the creditworthiness of the issuer. SIMON Markets LLC operates a platform that makes available offerings of structured investments and annuities to financial professionals. In operating this technology platform, SIMON Markets LLC earns revenue based on the volume of transactions that take place in these products and would benefit by an increase in sales for these products. Issuers of structured investments pay Axio Financial LLC fees based on the size of transactions.
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