Structured Retail Products
Structured retail products are, generally speaking, unsecured debt with payoffs linked to a variety of underlying assets. These products can be attractive to investors because they can offer higher returns and might even feature a level of principal protection—meaning some or all of your initial investment may be guaranteed by the issuer if the investment is held to maturity or called, subject to the credit worthiness of the issuer. However, these products can have significant drawbacks such as credit risk, market risk, lack of liquidity and high hidden costs. In addition, they may be callable after a fairly shortperiod of time, like one year.
One example of a structured product is a “steepener,” which allows investors to bet on the shape of the yield curve. The return on this type of product is linked to the spread between longer- and shorter-term interest rates—that is, the so-called steepness of the curve. For example, the return on one widely available product increases when the yield curve steepens and decreases when the yield curve flattens. Steepeners can be appealing to investors chasing return because some of these products have initial fixed interest rates that are high, and these products are often principal protected, but they do have their drawbacks. The fixed rates often convert to floating rates that typically change in concert with the steepness of the yield curve, as described above, so your return can vary or fall over time. Moreover, they usually have longer maturities, the secondary market for these products may be illiquid and they are often callable.
Another example is a structured note with principal protection. These investments typically offer full or partial principal protection and reflect the combination of a zero-coupon bond with an option or other derivative product whose payoff is linked to an underlying asset, index or benchmark. Structured notes with principal protection have the potential to outperform the total interest payment that would be paid on typical fixed interest rate bonds, so they may be attractive to investors seeking higher yielding investments. However, these notes also might underperform a typical fixed interest rate bond and could earn no return for the entire term of the note, even if you are holding the note to maturity. For more information on see FINRA's Structured Notes with Principal Protection: Note the Terms of Your Investment.
