Structured products

Structured products are restructured notes usually issued by investment banks that offer exposure to almost any global market sector combined with varying levels of principal protection. Structured products are often built around investment-grade bonds and are sometimes publicly traded and regulated.

Mixed and matched

Structured products allow investors to take a position in the market on almost any investible asset class while either completely or partially protecting their original capital depending on their risk appetite. Their capital-protection element usually derives from a zero-coupon bond purchased at a discount, while the return derives from a derivative, usually over the counter (OTC), such as a call option, swap or futures contract on the underlying asset. Producers are represented by the Structured Products Association (SPA), a New York City-based trade group dedicated to, among other things, promoting "structured products as a distinct asset class."

Structured products (SPs) usually become more popular during periods of market uncertainty when more conservative investors seek some level of 'downside protection' during volatile periods. Those with full protection might offer a note with payout based on the underlying asset's return, increased by forsaking degrees of capital protection. Losses of up to five percent to maturity are usually protected but the investor bears the cost of steeper falls unless they choose products of longer maturity. Most SPs track a single asset class but some, called 'rainbow notes', combine several assets into a single product.

Nonetheless, SPs don't appeal to all investors, mainly because they cap returns and so risk underperforming a strongly-growing market. Plus their publicly-traded market is often thin and tends to lack the liquidity sought by many traders, although a recent structured-product innovation from Barclays Bank called exchange-traded notes (ETNs) that trade like common stock on an exchange aim to improve this. Price transparency is also a concern since there is no uniform pricing standard and no way to compare pricing attractiveness between structured products.