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Should You Consider Adding Structured Notes to Your Portfolio? Thumbnail

Should You Consider Adding Structured Notes to Your Portfolio?

Financial Planning Insights Investing Portfolio Construction Retirement Funding Tax Planning

Professionals have compared structured notes to the innovative mindset behind mutual funds—with the main draw being zero interest rates. In the past, structured notes were a high-risk, high-return investment that only very wealthy investors could get involved in. Recently, however, the transition to using more technology for investing has opened the door for more individuals and families to invest using structured notes.

Centura Wealth Advisory works with clients to build a diversified portfolio when financial planning, and considering structured notes is a step toward having a more diverse portfolio. 

Listen to the recent Live Life Liberated podcast, “Structured Notes Simplified with Robert Sowinski,” for a professional perspective. 

What Are Structured Notes?

There are different types of structured notes that can be helpful to understand before investing.

 There are a few categories to know for understanding structural notes: 

  • Maturity
  • Underlying Asset
  • Protection Amount
  • Return/Payoff

Structured notes can be compared to a “hybrid security.”  They combine the features of various financial products into one. Structured notes combine bonds and additional investments to offer the features of both debt assets and investment assets.

Structured notes aren’t direct investments, but derivatives. They track the value of another product. The amount on a structured note will depend on the issuer repaying the premium and underlying bond. 

How do they work? 

The basic ways structured notes can be ‘structured’ are the following:

  • Provide downside market protection
  • Provide upside (or enhanced) participation
  • Provide regular payments/income in the form of coupons if certain market conditions are met
  • Provide a payout/return at maturity if certain market conditions are met

The U.S. Securities and Exchange Commission (SEC) provides more detailed information on structured notes: “Structured notes have a fixed majority and include two components—a bond component and an embedded derivative.”

Financial institutions, as a result, are generally responsible for designing and issuing structured notes, so then the Broker/Dealer can sell them to individual investors.

Potential Risks

It’s important to understand that structured investments will not be a perfect match for all investors based on their risk profile and current portfolio. They are risky as your investments can sit idly without growth

The SEC lists the risks that come with investing in structured notes: 

  • Market Risk
  • Insurance Price and Note Value
  • Liquidity 
  • Payoff Structure (which is affected by participation rates, capped maximum returns, and knock-in feature)
  • Credit Risk
  • Call Risk
  • Tax Considerations

Talk to us! 

If you’re interested in structured notes and diversifying your portfolio, speak to one of our trusted financial advisors today.