What’s Ahead:
- Structured Note Payoffs can potentially enhance market gains
- Capped Growth is a type of Structured Note Payoff that can noticeably multiply market gains, up to a cap
- Investors seeking to amplify mild-to-moderate positive return outcomes tend to appreciate this Note Payoff type
If you’re interested in investing with noticeably enhanced upside potential for mild-to-moderate positive returns, Capped Growth, one type of Structured Note payoff, may be appealing to you.
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. Those adjustments are commonly in the form of protection against negative returns and potential enhancement of positive returns.
Structured Notes are often used to express a cautious, but still positive, view on the market. As opposed to buying equities outright, a Capped Growth Note allows holders to earn returns on an underlying asset, usually a stock market index, up to a certain level. The Note’s composition of an options package paired with a long-bond position facilitates a customizable investing strategy within a single vehicle. Capped Growth Notes are among the more straightforward Note types, making them ideal for Note novices.
The defining characteristic of a “Capped” Note is that its performance at maturity is constrained by a predetermined percentage level. Therefore, if the Underlier rallies sharply, the Note’s return becomes limited. If, however, the market is modestly positive, a Capped Growth Note has the potential to outperform due to the combined effect of the underlying asset’s return and the Note’s Participation Multiplier.
Capped Growth Specifics
Capped Growth Notes are investments that let you potentially earn positive returns, up to a maximum amount called the Upside Cap, if the Underlier has a positive return.
When the Underlier’s positive return is between 0% and the Upside Cap, Capped 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.
However, when the Underlier’s positive return is above the Upside Cap, the Note’s return remains at the Upside Cap return. Since Capped Growth Notes do not have the potential for unlimited upside, they will often have a relatively higher Participation Multiplier than an Uncapped Growth Note.
The table below shows how Capped Growth Notes modify the Underlier’s return:
| Underlier Return | Note Return |
|---|---|
| 0% to Upside Cap | Underlier Return x Participation Multiplier |
| Above Upside Cap | Upside Cap |
The following chart shows how Capped Growth may adjust the Underlier return across multiple market environments.
Capped Growth may be a good option if you want to invest in an asset and increase its upside potential return. It’s most effective in mildly positive scenarios. For more information on choosing Note types, we recommend reading our “Choosing a Payoff Type” guide.
By understanding how Capped 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.
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 their accounting, legal, and/or tax professional before investing.
US126/1.0/2308
Please see our other important disclosures.
