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Whitaker-Myers Wealth Managers is an SEC-registered investment adviser firm. The information presented is for educational purposes only and intended for a broad audience. The information does not intend to make an offer or solicitation to sell or purchase any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Whitaker-Myers Wealth Managers reasonably believes that this marketing does not include any false or misleading statements or omissions of facts regarding services, investment, or client experience. Whitaker-Myers Wealth Managers has a reasonable belief that the content will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the firm’s ADV Part 2A for material risks disclosures.

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, the nature and timing of the investments, and relevant constraints of the investment. Whitaker-Myers Wealth Managers has presented information in a fair and balanced manner.

Copyright (c) 2023 Clearnomics, Inc. and Whitaker-Myers Wealth Managers, LTD. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company's stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.

  • Writer's pictureSummit Puri

Alternative investments – Structured notes

Last week, we defined alternative investments and explored one of the most common products within this category: REITs. If you would like a refresher or haven’t had a chance to review it, it’s a short 3-minute read here. This week, we’ll explore another product under the alternative investment umbrella: the structured note.   

 

What is a structured note?

A Structured note is a financially engineered product (or vehicle). Sounds made up, right? Well, from my experience, if there is a creative method of making money, someone is bound to find it!  

 

Structured notes are engineered, but they are engineered with the goal in mind. These products usually consist of at least two components. The first is a bond, and the second is a derivative. Most of you have likely heard of bonds but may not be familiar with the term derivative (in finance lingo).

 

Derivatives are where a majority of returns come from within the structured note product. A derivative ‘derives’ its value from an underlying asset or index. This can be a market index such as the S&P 500 or individual stocks, currencies, commodities, or other equity products. These derivatives are most commonly purchased as call or put options. We’ll keep the discussion around put and call options for a future post, but let’s explore the composition of structured notes in more detail.

 

Here's how structured notes work:

First and foremost, there are multiple different kinds of flavors of this ice cream, and we’re not going to explain them all. However, for this example, we’ll keep it reasonably simple, discussing the use of a principal-protected structured note.  

 

As mentioned above, the structured note includes a bond and a derivative. Specifically, in a principal-protected structured note, the bond is a zero coupon bond. Hold on there, Summit, you can’t throw around terms like that! Ok, well, a zero coupon bond has the same components as a traditional bond (coupon, maturity date, and face value), but there are zero annual or semi-annual coupon payments in this fixed-income security.  In most bonds, there are coupon payments that support as a form of income for the investor; for this principal-protected structured notes, the zero coupon component is engineered to protect the principal.

 

Let’s walk through an example calculation

To illustrate how this works, let’s say you’ve got a cool $10,000 ready to invest.  You’d like to get good market exposure but don’t want the downside risk and volatility of the market. So, you decide to purchase a zero-coupon bond. Since the bond does not have a coupon, you can get it at a discount. Who doesn’t like a good deal/sale!?  For the sake of this example, we’ll assume that interest rates were 5% on a two-year treasury. This means you could purchase the bond at approximately 90% of face value ($9,000 minus fees) and then invest the remaining 10% as a 2-year call option with a strike price at current value where you’d like. To get good market exposure, let’s say you pick an index like the S&P500.

 

 

So, if the S&P 500 index declined in value (from the day of purchase) through the end of the term, you would not exercise the call. However, if the S&P 500 went up in value, you would have an option to exercise the call. In both cases, the original principal would still be ‘protected’ at the maturation of the bond, and if the index outperforms, the upside is also realized.

 

Summary

Structure

They are complex products that combine a bond with a derivative element. The bond component provides a basic level of security, while the derivative allows for the return to be linked to the underlying asset's performance.

 

Return

The payout you receive depends on how the underlying asset performs. Various types of structured notes are designed for different goals, such as growth or income.

 

Benefits

Structured notes can allow investors to access specific market segments or gain exposure to assets they might not otherwise invest in directly. In certain situations, they can also potentially provide higher returns than traditional fixed-income investments.

 

Risks

Keep in mind that structured notes are not without risks. They can be complex and challenging to understand, and they may involve lower liquidity and issuer default risk compared to other investments.

 

I’m a chocolate chip guy

We’ve only tried/explored one flavor of ice cream at the shop. The principal protected note is maybe the chocolate chip ice cream. Still, we can continue to add a peanut butter drizzle (like our Financial Coach Lindsey prefers), sprinkles (like buffers), waffle cones (put options), or combine multiple structured notes to come up with the competition to Baskin Robin’s 31 flavors. The flavor you pick is all based on your risk tolerance, goals, and time horizon. Structured notes are complex products, and I don’t recommend them to anyone early in their investing journey. Set your foundation and then explore the alternative investments when ready. Our Financial Advisor Team at Whitaker-Myers Wealth Managers is well-versed in alternative investments, and we are here to guide you with the heart of a teacher. Schedule some time with one of our team members to walk you through various investment strategies to align your finances with your life goals.

Commentaires


Whitaker-Myers Wealth Managers is an SEC-registered investment adviser firm. The information presented is for educational purposes only and intended for a broad audience. The information does not intend to make an offer or solicitation to sell or purchase any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Whitaker-Myers Wealth Managers reasonably believes that this marketing does not include any false or misleading statements or omissions of facts regarding services, investment, or client experience. Whitaker-Myers Wealth Managers has a reasonable belief that the content will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the firm’s ADV Part 2A for material risks disclosures.

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, the nature and timing of the investments, and relevant constraints of the investment. Whitaker-Myers Wealth Managers has presented information in a fair and balanced manner.

Copyright (c) 2023 Clearnomics, Inc. and Whitaker-Myers Wealth Managers, LTD. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company's stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.

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