What’s Ahead:
- Structured Note Payoffs can potentially enhance market gains.
- Soft Protection can add an extra level of downside risk mitigation.
- Soft Protection may be available at various levels.
If you’ve heard of Structured Notes but aren’t quite sure what they are or how they work, this brief is for you. It explains how Soft or Barrier Protection, one type of Structured Note protection, can eliminate the negative return of the investment in volatile market conditions.
Structured Notes, categorized as bond instruments, have characteristics of both an equity security and a fixed-income product. Their performance is linked to the return of an underlying asset. The specific payoff profile and protection levels of a Structured Note can be tailored to suit the preferences of advisors for their clients. Two types of protection levels exist: hard protection (buffer) and soft protection (barrier). This brief explores the features of soft protection and examines how different levels of this protection can mitigate or reduce the negative return of the underlying asset in specific market conditions.
Soft Protection Specifics
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.
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.
Please see our other important disclosures.
