Investing in Structured Notes

What you should know as a minimum when investing in structured notes.

I just wanted to post a brief note of what I think you should look for if you are considering investing in a structured note (a structured product).

Term – the standard notes run from 2-5 years but there are of course other terms as well. Look for the term that suits your investment horizon. Make sure it is money you will not need for the term. It is most often possible to sell a note prematurely, but it is seldom good business for the seller. To avoid this, it might be wise to invest in notes with different terms.

Indices – a structured note is set up to follow one or several indices or equities. Make sure these are the right ones for the type of note you are considering. For example, I have seen many income notes where the flow of income depends on a set of single shares not doing too badly. But in a set of single shares there is a high likelihood that there will be at least one share doing very bad, thus risking the whole income flow. In such cases, make sure you work only with major indices, like S&P500, FTSE100, etc, since they are much, much less likely of doing that bad.

Capital protection – one major reason for investing in structured notes is the capital protection involved. Make sure you understand how the protection works. Also make sure that the level of protection is competitive, i.e. that it is the best level of protection offered for the kind of note you are considering.

Issuer – finally, make sure that the issuer has a good rating. You are basically buying a bond and your investment will not be better than the balance sheet of the issuer of the note. I have seen notes with issuers are places unheard of and with very little financial data online. Moreover, a good rating is not enough. I had clients invested in Lehman Brothers and they were ranked the #1 investment bank the day before they went bankrupt. Not a nice experience for me and certainly not for the clients. So make sure you invest with an issuer that is very, very likely to not go bankrupt or will be saved by others. And make sure you invest with several issuers rather than just one.

I am here to help and feel free to post any comments.

Here is a link to structured products on Wikipedia.