Series 65: 4.5.1 Structured Products

4.5.1  Structured Products

Structured products are not stocks, bonds, or derivatives. Instead, they are hybrid products that combine elements of multiple types of securities. For instance, a common structured product combines a bond with a derivative. Structured products are appealing to retail investors because they often promise features that a single type of product cannot provide on its own, such as higher yields with principal protection. But structured products are often complex, and may be too complicated for retail investors to understand. In fact, in many cases, the goals of an investor can be met through a simpler and more straightforward portfolio of stocks and bonds. But the overly complex nature of structured products has allowed them to continue, even when they yield inferior performance.

The structured products that have received the most attention from NASAA and FINRA are structured notes with principal protection. These are long-term notes that track an index and offer principal protection. The note is usually a zero coupon bond that pays the principal back at maturity, plus some participation in the performance of an index. This type of unsecured note offers principal protection plus additional returns by combining a bond structure with a derivative that is based on the performance of an index (e.g., stocks, currencies, commodities). Usually a financial institution, such as a bank or broker-dealer, issues the notes, and they often mature in 10 years.

Despite their name, structured notes are not risk-free. Here