What’s Ahead:
- Structured Note Protection can potentially eliminate or reduce market losses
- Soft Protection is a type of Structured Note Protection that can potentially eliminate a degree of market losses
- Investors seeking to mitigate some negative return outcomes while enhancing upside potential tend to appreciate this Note Protection type
Market Exposure with Protection
If you’re interested in investing with a potential to protect against negative returns while also enhancing market upside, you may find Soft Protection Notes appealing.
This brief explains how Soft or Barrier Protection, one type of Structured Note protection, can eliminate the negative return of an investment in some market conditions.
But first, a couple basics:
- Structured Notes are like a hybrid between a stock and a bond. Although they are technically bonds, their market value typically derives from the return of a stock or index, called the Underlier.
- The Structured Note has performance terms that adjust the return of the Underlier to determine the Structured Note’s return. Those adjustments are commonly in the form of protection against negative returns and enhancement of positive returns.
What Differentiates Soft Notes
Soft Protection insulates against market risk by absorbing all of the Underlier’s negative return in some cases by modifying the return of the Underlier on the maturity date of the Structured Note.
When the Underlier’s negative return is between 0% and the protection level, Soft Protection absorbs the Underlier’s negative return completely, resulting in a 0% return for the note. In other words, the Structured Note fully absorbs the Underlier’s negative return.
However, when the Underlier’s negative return is below the protection level, the note’s loss is the same as the Underlier’s loss.
The table below shows how Soft Protection modifies the Underlier’s return:
| Underlier Return | Note Return |
|---|---|
| 0% to Protection Level | 0% |
| Below Protection Level | Underlier Return |
The following chart can be used to show how Soft Protection may adjust the Underlier return across multiple market environments.
Soft Protection may be a good option if you want to decrease an asset’s potential for a negative return while also potentially enhancing the asset’s upside. It’s most effective in positive scenarios and common negative scenarios. For more information on choosing note types, we recommend reading our “Choosing a Protection Type” guide.
By understanding how Soft Protection works, you can potentially mitigate your risk in uncertain market conditions, and produce a greater return on your investment than holding the Underlier in the traditional way.
Please see our other important disclosures.
