3 Ways To Use Structured Products In Your Portfolio
In previous posts, we have explained what structured products are and why you might not have heard of them before. Many investors remain unaware of these financial instruments, often perceived as complex and unapproachable, even though structured products are 50% bigger than the ETF market.
Today, we simplify and demystify some of the structuring products, exploring three effective ways to think about and incorporate structured products into your investment portfolio. In many cases, it makes more sense to use a structured product than buying an asset.
1. Hedge Against Single Asset or Market Risk
Proper risk hedging is the number one difference between amateur and professional investors. Structured products can act as an effective hedge against single asset or market risk. One type of structured product - principal hedged notes - has a built-in safety net, ensuring your initial investment remains safe even when markets swing unfavorably.
Think of this like an insurance policy on your investment. For example: you would like to have a small portion of your portfolio exposed to a highly volatile asset class like crypto - specifically Bitcoin. While you might not see sky-high returns if Bitcoin goes up, you won’t suffer substantial losses if Bitcoin goes down 80% in 6 months. This is perfect for someone who are looking to protect the gains they have made on their crypto portfolio. Also, for risk-averse investors or those nearing retirement, this kind of stability is priceless.
2. Passive & Tailored Returns
Think of structured products as a tailored exposure to a specific asset without you having to manage the position on a day-to-day basis. Within your portfolio, you may have higher risk appetite for some assets such as a high-beta growth stock than others. You may also be more convicted on US broad market than the FTSE.
In these scenarios, it may make more sense to buy a structured note for the asset rather than buying the underlying asset. For example: a structured product linked to the SPY could promise double the return if the market increases by a certain percentage and capped loss if the market declines. The note requires no day to day management from the investor as it guarantees the payout structure before the note is purchased. The investor would capture the returns by maturity date of the note if their market view is correct.
3. Tactical Allocations
Structured products are suitable for many tactical portfolio maneuvers. Below we list some examples that may be relevant for many investors & traders:
Example 1:
You are bearish on Apple stock for a short period of time but don’t want to manage a short position as it is too risky and time consuming.
How Structured Note Can Help:
Buy a principal hedged note on the stock that captures the downside within a fixed expiry date. This means that if Apple stock goes down during the time period of the note, the note will earn a positive return. If not, then the note’s max loss is capped. Versus shorting the stock, the note requires no daily management from the investor - you don’t have to worry about margin or the unlimited loss potential from shorting Apple stock if the stock goes up on value.
Example 2:
You think Bitcoin might go down to US$20,000 and would be willing to buy it at that price. You would like to earn higher than average yield on your capital while you wait for the price of Bitcoin to go down.
How Structured Note Can Help:
Purchase a dual currency note of $20,000 denominated in both Bitcoin and USD. If Bitcoin price is US$20,000 or below on maturity date of the note, you will take delivery of Bitcoin in exchange for the note. If Bitcoin price is above US$20,000 on maturity date of the note, you will get your principal US$20,000 and yield back.
Structured products can be linked to a variety of underlying assets – from stocks and bonds to commodities and currencies, even to more unconventional assets like cryptocurrencies. This offers a unique ability to expand your portfolio’s reach beyond traditional investments - through structured products.
Imagine having a structured product that gives you exposure to the crypto market. There is the need to understand the intricacies of crypto trading, custody, and keys. In this way, structured products allow you to dip your toes into new waters, all while keeping your investment strategy intact.
Keep in mind, structured products are:
Passive investment vehicles. This means they are not meant to be traded on a day-to-day basis. This reduces your trading cost while maintaining a directional view on a market.
Highly bespoke. You can adjust the risk, return, and payoff structures of a product to match your investing objectives.
Portfolio in a box. In each structured product you have a mix of different financial instruments. You can use it to get exposure to a single asset or a whole market. It can be described as a highly versatile Exchange Traded Fund (ETF).
Conclusion
Incorporating structured products into your portfolio is like adding new colors to your investment palette. They offer a unique way to hedge against risk, add passive & tailored potential returns, and diversify your portfolio.
However, as with all investing, it's crucial to understand what you're getting into. Always read the fine print, assess the risks, and ensure the product aligns with your financial goals.
Remember that none of the information presented on this letter and blog are investment advice or solicitation of any kind. Fig Investments currently is not offering any investment products. You should do your independent due diligence before investing money into any asset. Please see Fig Investments’ disclosures here.