Understanding Structured Notes: Worst-of Feature

Advisors are often familiar with vanilla Structured Notes in which payoff potential is linked to a single underlying asset. For example, both Growth and Income Notes have hard and soft protection. Yet  there’s another Note type that can feature even better yield or participation potential using two or more underlying assets (or indexes). 

A “Worst-of” Note’s performance is derived from the worst-performing return of the reference stocks, ETFs, or indexes. Alternatively, you may see this Note called a “Best-of.” This twist on a typical Note allows for not only a higher potential yield but also a greater downside protection level or a larger enhanced upside participation rate. In general, a “Worst-of” Note can work best in a positive market and one in which there are high correlations among the underlying assets. 

For background, a Structured Note is a flexible investment vehicle designed to meet the needs of investors looking to express a variety of market views. They can be tailored to align with the risk-and-return preferences of many client types and risk and return objectives. A Structured Note is a straightforward package of a long bond with an options component based on a reference asset, or in the case of “Worst-of” Notes, two or more Underliers.

About half of the time, Structured Notes have one Underlier. The Structured Note’s return is based on the return of the Underlier. The other half of the time, Structured Notes are linked to more than one Underlier, offering a way to invest in multiple assets within one investment.

Typically, the Structured Note’s return is based on the lesser performer of the group. This is known as a “Worst-of” Note. Since the Note has higher risk by being pegged to the loser, it makes the Structured Note’s performance terms more lucrative to compensate the investor for the extra risk.

The following video can help illustrate how a “Worst-of” Note works.

“Worst-of” Notes might be a good option if you want to enhance the performance of the Structured Note and have a similar amount of confidence in multiple assets that you would like to invest in.

Content and any tools discussed are provided for educational and information purposes only. Halo Investing makes no investment recommendations and does not provide financial, tax, or legal advice. Any structured product or financial security discussed are for illustrative purposes only and are not intended to portray a recommendation to buy or sell a particular product or service. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. Examples are provided for illustrative purposes only and not intended to be reflective of results you can expect to achieve. 

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.

Past performance is no guarantee of future results.

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