What’s Ahead:
- Structured Notes can potentially enhance the return of a stock, ETF, Index, or other security
- Growth Notes apply a multiplier to the Underlier’s positive return and Income Notes can generate periodic coupons payments
- Four hypothetical market environments are compared to show how these payoff types are similar to traditional stocks and bonds
Modified Market Exposure
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 Structured Notes can enhance or modify the way an investment earns a return in various market environments.
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.
Growth Note and Income Note Specifics
The main reason investors use Structured Notes is because they modify the behavior of their Underlier, allowing for a more tailored approach to risk, return, and market outlook.
Growth Notes multiply the Underlier’s positive return on the Note’s maturity date, potentially generating a greater return than the Underlier*.
On the other hand, Income Notes produce returns in the form of interest payments, potentially providing a more consistent positive return.
Another way to think about them is that Growth Notes typically behave more like stocks, driven by price appreciation, while Income Notes behave more like bonds, driven by income yield.
Charts can be used to show how Growth Notes and Income Notes work across different market environments.
Growth Notes may be a good option if you want to invest in an asset and enhance it to generate higher returns in solidly positive markets, whereas investors seeking to generate consistent returns who are willing to sacrifice large upside may lean toward Income Notes.
Seeing the results in table form can help complete the picture on the upside and downside differences of payoff types. For more information on choosing note types, we recommend reading our “Choosing a Payoff Type” guide.
| Market Environment | Strong Up Market | Mild Up Market | Mild Down Market | Strong Down Market |
|---|---|---|---|---|
| Underlying | 40% | 15% | -15% | -40% |
| Growth Note | 48% | 18% | 0% | -25% |
| Income Note | 30% | 30% | 30% | -10% |
By understanding how different types of Structured Notes work, you can potentially increase returns in a variety of market conditions and produce a greater return on your investment than holding the Underlier in the traditional way.
Please see our other important disclosures.
*Price return, if upside participation is greater than 100%.
