Peter Horacek, Managing Director and Head of Structured Investments Distribution for iCapital, joined Keith Black, Managing Director of RIA Channel, to discuss the characteristics of structured investments.
Structured investments allow investors to define outcomes when investing in public markets. Structured investments can offer payoffs linked to an index such as the S&P 500 while investing primarily in bonds to reduce downside risks. Some products, such as CDs or principal-protected notes, are backed by the credit of a bank while eliminating the risks of equity market investments. These products became more popular after 2022, as the higher interest rate environment allows for the purchase of options that provide greater exposure to the returns of the equity market.
While offering protection against some or all declines in equity markets, structured notes offer investors a portion of the market’s upside return. A structured note with a buffer offers hard protection over some range of index returns. For example, a note with a 10% buffer would earn a loss of 1% when the equity market declined by 11%, as the buffer insures against the first 10% of equity index losses over a stated time period. A structured note with barriers offers contingent protection by offering investors principal protection as long as the market doesn’t make larger-than-anticipated moves. For example, a note with a 25% barrier will offer complete principal protection for a 20% market decline, but the protection expires once the market has declined by 25% or more, leaving investors with the market return. Clients with a lower risk tolerance may prefer principal-protected products with less upside exposure, while clients with greater risk tolerance may prefer buffers or barriers with less protection but greater return potential and market exposure. The majority of the notes issued through iCapital are customized to the term and the degree of upside potential and downside protection.
The returns to structured notes before expiration depend on a number of factors, including interest rates, credit risk, market risk, volatility, and correlation between markets. As market volatility increases, option prices rise, which may allow structured note issuers to offer more favorable terms to investors.
While not all home offices can facilitate advisor and client investments in structured notes, an increasing number are allowing access to structured notes through platforms such as iCapital. The platform includes product access, post-sales support, and video-based education.
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