Structured Investments in Action Part II: Risk-Managed Growth Potential

How and why structured investments are used within a portfolio to pursue growth objectives.

Structured investments have evolved a lot over the last few decades, with increasingly flexible ways to tailor a portfolio to the needs of investors looking for either income or growth.

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 guaranteed 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 how 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

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:

• The potential for losses that are 1:1 from the underlier’s initial level should the underlier close below the barrier level at maturity; losses could be significant
• The underlier’s return is based on price return only and does not include dividends

Growth use case #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.

This type of note can be visualized in the below hypothetical illustration:

Underlier: S&P 500 Index

Term: 18-months

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 pay-out potential, by carefully reviewing the offering documents before investing.

Want to learn more? Connect with us:

If you are a financial professional, email hello@simonmarkets.com any time with questions or feedback.

If you are an investor, visit simon.io/engage for articles and videos to help you learn more about risk-managed solutions.

©2022 SIMON Markets LLC. All Rights Reserved. | Originally Published 2022.02 | Updated 2022.07

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.

This material is for informational purposes only and is not to be construed as a recommendation or an offer or solicitation to buy or sell any security, financial product or instrument, or otherwise to participate in any particular trading strategy. In providing information on hypothetical, generic structured investments, SIMON is not recommending a specific security, nor does it recommend investing a certain percentage of a portfolio to one structured investment. Before investing in any product, an investor should review the prospectus or other offering documents, which contain important information, including the product’s investment objectives or goals, its strategies for achieving those goals, the principal risks of investing in the product, the product’s fees and expenses, and its past performance.

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 technology 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.

This material may not, without SIMON’s prior written consent, be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient. SIMON shall have no liability, contingent or otherwise, to the user or to third parties, for the quality, accuracy, timeliness, continued availability, or completeness or to update any data contained in this material nor for any special, indirect, incidental or consequential damages which may be incurred or experienced because of the use of the data made available herein, even if SIMON has been advised of the possibility of such damages. This material was not prepared with a view to public disclosure or to conform with any disclosure standards under any state, federal or international securities laws or other laws, rules or regulations, and SIMON Markets LLC does not take any responsibility for the use of the information in this material.

Securities products and services offered by SIMON Markets LLC, a broker-dealer registered with the U.S. Securities and Exchange Commission, a member of FINRA / SIPC. Annuities and insurance services provided by SIMON Annuities and Insurance Services LLC. Please visit www.simon.io for complete disclosures, including terms of use and privacy policy.