Structured Investments in Action Part III: Understanding Trade-Offs in Pursuit of Enhanced Income

Learn some of the benefits and considerations of using structured investments to pursue enhanced coupons.

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 growth or income.

Income-oriented structured investments are typically used to pursue the opportunity for enhanced coupon payments versus more traditional investments like bonds. Unlike fixed income instruments, the coupon payments on market linked income notes are based on the performance of an “underlier” such as an equity index, a basket of indices, or even a single stock.

While the structured investment market is best known for its multitude of risk-managed growth strategies, demand for market linked income notes has increased dramatically in recent years, driven in part by a lack of alternatives in the fixed income markets. So, what do income solutions look like in the structured investment world? A high-level overview can shed some light:

Income solutions

• Generating yield is the goal
• Generally characterized by the potential to earn coupon payments during the life of the investment
• Have coupons that are generally dependent on the return of an underlier such as an equity index, a basket of indices, or a stock, so income may not be consistent
• Typically offer contingent downside protection which can expose investors to the full downside risk of the underlier (though some solutions may provide partial or full protection)

The appeal of market linked income notes is that they typically offer high-single digit to double-digit coupons, depending on factors such as the volatility of the underlier and its dividend yield. This can be attractive to income-seeking investors.

But, as investors look to the structured investment market for these potentially enhanced coupons, it is important to be aware of the trade-offs involved with using equity exposure to try to generate yield. Market linked income notes have certain unique considerations, and investors should:

• Understand that, unlike bonds, some income generating structured investments may carry risk of significant loss and/or risk of receiving no coupon payments at all
• Be aware that they are not eligible to receive dividends on the underlier; they forego their dividend in exchange for the potential coupon
• Understand whether the investment has a call feature and if it does, what catalysts drive its callability
• Understand that market linked income notes are buy-and-hold investments—there is no guaranteed secondary market and while issuers have historically bought back structured investments, they are under no legal obligation to do so
• Be comfortable with the creditworthiness of the issuer since payments made by structured investments are subject to the credit risk of the issuer

One of the more popular income solutions in the structured investment market in recent years has been callable market linked income notes with contingent coupons. These notes can provide income, paid monthly, quarterly, semiannually, or annually, as long as the underlier remains at or above a certain threshold, which is called the coupon contingency level. If the underlier falls below the coupon contingency level on any of the observation dates, the periodic payments stop until the underlier rises above the threshold on a future observation date. They come with different types of call features, and many different levels of downside protection.

For more information on how they are used and how they work, read “A Non-Traditional Approach to Generating Yield.”

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, pursue income enhancement, 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.