Structured products are securities issued by financial institutions whose returns are based on, among other things, equity indexes, a single equity security, a basket of equity securities, interest rates, commodities, and/or foreign currencies. Thus, your return is “linked” to the performance of a reference asset or index.
A common type of structured product is called a structured note. These have a fixed maturity and include two primary components, a bond component and an embedded derivative. There are several varieties of structured notes sold to individual investors including principal protected notes, reverse convertible notes, enhanced participation or leveraged notes, and hybrid notes that combine multiple characteristics.
The benefits of structured products may include principal protection, tax-efficiency, reduced volatility and the ability to earn a positive return in a low yield or flat market environment. However, structured products can also be risky due to the credit characteristics of the underlying bond, a lack of liquidity or secondary market, and less than reliable pricing information. Also, many structured products tend to be very complex in nature due to the relationship between the bond component and the derivative. Finally, the fees on structured products tend to be difficult to determine.