How Structured Products Provide Indirect Access to an Underlying Asset
Written by Luma Investment Solutions on Dec 19, 2022
If you’ve been looking to promote portfolio diversity and have been curious about exploring the possibilities offered by the relatively obscure investment branch known as alternatives, you’re not alone. While many of them, especially structured products (which we’ll focus on here), may seem complex and can deter the casual investor, the reality is that they’re still tied to the ever-present stock market. If you have an idea of how standard indices operate and have a grasp on how to monitor market performance, you already have the tools you need to travel the path from a well-known broad market index to a structured product. This article is going to “lift the hood” on structured products so you can see how they are linked to indices, why they’re an exciting investment vehicle that you should consider adding to your clients’ portfolios, and more importantly how they’re now able to be tracked using identifiers similar to those seen on traditional mutual funds and ETFs.
The first question to address is, what exactly is a structured product?
Briefly, a structured product is a debt instrument built on the foundation of an underlying asset, such as broad market indices (e.g., S&P 500), with a preset maturity term. How the market index performs impacts how the note performs. What works for one investor may not work for another. The beauty of a structured note is that their composition allows financial advisors and portfolio manager to tailor each note they create to the preferences of each client. Structured products give the flexibility to customize a note with various degrees of risks, buffers, barriers, and protections.
Second question: How are structured products built?
An advisor will find out from their client what their individual investment goals are as well as the level of risk they are comfortable with (common features include capital protection, enhanced upside participation, and yield enhancement). Based on that profile, the advisor then has a specific formula—built on the foundation of a market-linked asset—that can then be used to approach issuers with a desired product composition. Next, the advisor reviews potential investment institutions that offer the product, selects the best issuer possible, and purchases the product for inclusion into the client’s portfolio. The ultimate value of the product is tied to the performance of the underlier, hence creating the indirect connection.
Third question: Why go through the trouble of making the asset an underlier with other components stacked on top rather than purchase the asset directly?
This is a fair question. It may seem like constructing the note make things more complex than they need to be, but essentially what a structured product provides is another layer of protection. Ask yourself how comfortable would you feel sending your client onto a rollercoaster without a lap rail? You want your clients to feel safe. A wise advisor can create structured notes that retain the potential gains reaped from market growth while also installing downside protection to mitigate risks.
Finally, how does one go about tracking the performance of structured products?
This is the exciting part. In just the past year, new innovations in fintech development have made the process of finding, analyzing, and tracking structured notes easier than ever before. Technology is revolutionizing the entire field of structured products, resulting in enhanced transparency alongside a simple and digital process for all advisors. For instance, Luma and the Nasdaq Fund Network (NFN) have worked together to bring identifiers to structured products. Similar to mutual fund symbols, the identifiers are a string of special characters, each one defining a different holding. Identifiers have been given to 100M+ investors across the NFN’s 400+ market data platforms. By using these unique identifiers, structured products are now searchable on widely used market data platforms like Yahoo! Finance and CNBC, meaning that advisors using the Luma platform can use these identifiers to instantly find and monitor key data for specific products. By coming together in this shared mission of increasing transparency, Luma and Nasdaq are changing the financial market by empowering advisors across the globe.
Structured product volume has grown by more than 30% from 2020 to 2021 along. Why? Because the level of customization they offer allows portfolio managers and investment advisors the freedom to choose which underlying assets they think will perform best. Now is the time to step out on that branch. It’s much stronger than you may think. And by using Luma’s all-in-one platform you’ll have the tools, resources, technology, and training tools to gain an edge in managing the full lifecycle of structured products and lead your clients to better solutions.