Uncapped Growth Notes are one of the most vanilla forms of Structured Notes. Often they are called “Enhanced” Notes or something to that effect. Because they have the potential to retain, even enhance (or “multiply”), an investment’s upside potential, they can be an effective vehicle when markets are positive or otherwise advancing higher.
Here are the 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. These adjustments are generally a contingent form of protection against negative returns coupled with the potential enhancement of positive returns.
Structured Notes offer a versatile investment option that can align with various market views, and they generally fit well into the equity sleeve of an allocation, though they are technically a bond product. An options package is used to craft an upside participation rate with downside protection. Among the most straightforward Note types is the Uncapped Growth Note. If you have clients looking to get started investing in Notes, this can be an ideal place to begin.
An Uncapped Growth Note, also referred to as an “Enhanced” Note, offers investors the opportunity to participate in the return of one or more underlying assets. Often the S&P 500 is used, but other indexes are also commonly used by advisors. However it is packaged together, an Uncapped Growth Note can be an effective way to participate in a bull market either on a one-for-one percentage basis or with enhanced returns. The Participation Multiplier indicates the level of return enhancement on the Note. There are three variants of Uncapped Growth Notes to choose from: Enhanced, One-for-One, and Partial.
Uncapped Growth Specifics
Uncapped Growth Notes are a type of investment that lets you potentially earn positive returns if the Underlier has a positive return.
When the Underlier’s return is positive, Uncapped Growth Notes amplify the Underlier’s positive return by a Participation Multiplier. An appealing element of the Participation Multiplier is that it can be above 100%, or 1x, which can elevate the Structured Note’s return higher than the Underlier’s return.
The table below shows how Uncapped Growth Notes modify the Underlier’s return:
| Underlier Return | Note Return |
|---|---|
| Above 0% | Underlier Return x Participation Multiplier |
The following chart shows how Uncapped Growth Notes may adjust the Underlier return across different Participation Multiplier types: Enhanced (greater than 1x), One-for-One (exactly 1x), and Partial (less than 1x).
Visualizing how Uncapped Growth Note participation rates work
For illustrative purposes only. This information should not be taken as an indication or prediction of investment results. Specific terms and conditions will vary based on the individual terms of the Note resulting in different payout structures and risks.
Uncapped Growth may be a good option if you want to increase an asset’s upside return potential. It’s most effective in moderate to significantly positive scenarios. For more information on choosing note types, we recommend reading our “Choosing a Payoff Type” guide.
By understanding how Uncapped Growth Notes work, you can potentially increase returns in positive market conditions and produce a greater return on your investment than holding the Underlier in the traditional way.
Please see our Halo Disclosure Page for important disclosures.
DISCLOSURE:
This document is intended for institutional investors and/or wealth advisers only, and is not intended for distribution to others. Halo Investing, Inc.(“HII”) is a parent company of Halo Securities, LLC. HII is not a registered broker-dealer or registered investment adviser. Securities are offered through Halo Securities, which is an SEC registered broker-dealer and member of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation(“SIPC”). Halo Securities acts as distributor and selling agent for certain securities offerings and is not the issuer or guarantor of any security.
Structured Notes have complex features and may not be suitable for all investors. They are sold only by prospectus and investors should read the prospectus and pricing supplement carefully before investing as they contain a detailed explanation of the risks, tax treatment, and other relevant information about the investment. The tax treatment of Structured Notes varies depending on the offering, and can be uncertain in some cases. Structured products are sold through financial professionals, and investors should consult accounting, legal, and/or tax professional before investing.
What are Structured Notes?
Structured notes 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. Structured notes have a fixed maturity and include two components–a bond component and an embedded derivative. Financial institutions typically design and issue structured notes, and broker-dealers sell them to individual investors. Some common types of structured notes sold to individual investors include: principal protected notes, reverse convertible notes, enhanced participation or leveraged notes, and hybrid notes that combine multiple characteristics.
Risks and Other Considerations with Structured Notes Complexity
You and your broker should take time to fully understand the manner in which your return on a structured note is calculated. You should understand the reference asset(s) or index(es) and determine how the note’s payoff structure incorporates such reference asset(s) or index(es) in calculating the note’s performance. This payoff calculation may include leverage multiplied on the performance of the reference asset or index, protection from losses should the reference asset or index produce negative returns, and fees.
Participation rates
Some structured notes provide a minimum payoff of the principal invested plus an additional payoff to you based on multiplying any increase in the reference asset or index by a fixed percentage. This percentage is often called the participation rate. A participation rate determines how much of the increase in the reference asset or index will be paid to investors of the structured note. For example, if the participation rate is 50 percent, and the reference asset or index increased 20 percent, then the return paid to you would be 10 percent (which is 50 percent of 20 percent).
