Money Machine

Money Machine Part III: Structured Products

12/30/2020 8:00:00 AM
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When starting a wealth planning strategy, the most common beginner's mistake is having money static in a bank account. Inflation will eat away your capital little by little, and with interest rates in the banks at their lowest point in history, it only gets worse. You only need to do the math to see how your money is evaporating year after year. Plus, unless you’re using ultra-safe private banks, your money is not safe because the bank is using it to invest or lend it to third parties.

Any knowledgeable financial manager knows this. You know you need to move your money around, and you cannot keep it in the same basket. In the first two Money Machine episodes, we gave you two options: a brokerage account to invest in all kinds of securities and investing in precious metals.

A brokerage account works best if you manage your own money and precious metals is a long-term investment, primarily targeted at keeping your money safe. But now, we will present to you an easy way to generate strong returns without having to worry too much: structured products.

Today it's easy to distribute your capital among the best options on the market. You can buy shares in Wall Street, Hong Kong, or Europe to enjoy unmatched strength. If you are not faint-hearted, you can invest in cryptocurrencies and receive unseen returns, or you can go for distressed assets. But investors know that this takes endless time to analyze, so they trust brokers and family office firms that can save them the trouble.

What to do?

Options are limitless, but everyone knows that investing blindly is dangerous. It's easy to burn your capital in unsafe transactions, get stuck with stocks that go nowhere, give it all up for an innovative idea that ends up being smoke (and worth even less). Even worse, you can have all your capital in one market that can be ruined by some external factor.

Thus, if you want to play safe while still generating solid returns, one of the best market options is structured products.

Accessing tailored products that meet your customers’ needs in terms of risk and revenue potential can substantially reduce the operational work of any broker. Meanwhile, they significantly increase the number of offers they can offer and thus your profits.

Let’s explain what a structured product is.

Structured products: The safe bet for abundance

Structured products are a niche market that has matured over the years and is reaching its peak. 

They are an effective investment alternative for those who want to obtain a reasonable return on their capital while ensuring their investment.

A structured product is a pre-packaged investment that provides a return based on an underlying asset’s performance, such as a stock market index or a basket of shares. 

In layman’s terms, a structured product is an investment specially prepared to provide you with a predetermined return based on a set of assets. So, you invest a determined amount of money in the product, and you have the potential to receive a percentage of your investment in a determined period (every three months, six months, annually, etc.)

The potential return and level of capital at risk is pre-defined at the outset. Payoff profiles can be designed to take advantage of rising, falling, or range-bound markets and delivered in a way that can be tailored to meet specific investor needs.

This can help investors by offering certainty over a defined period and want some degree of protection over their initial capital.

In essence, we could say that they are composed of two parts. First, a medium-term note that guarantees security and a margin of investment in call options usually, which is what provides the real benefits.

Why should you choose a structured product?

  • With interest rates at an all-time low, many investors are no longer able to secure returns in the bank or build a society that they would like.
  • Some have sought higher returns from the stock market, but with uncertainty dogging equity markets, many have been disappointed, receiving low returns or even losing money.
  • Structured products can be designed to deliver positive returns in rising, flat, and falling markets. Details of how the investment’s performance will be determined, repayment dates, and capital risk are all set out before investment.

There are different types of structured products:

Income: An income product is designed to provide the investor with a steady stream of payments during the investment term whilst still providing a pre-defined level of capital protection.

Growth: Growth products aim to return a growth payment and a pre-defined level of capital protection at maturity of the investment, this investment can provide the opportunity for larger gains than similar income-based notes.

Capital Protected: Structured products can also be designed for investors seeking high capital protection levels with a guaranteed return and an opportunity to participate in stock market growth.

Autocall: All of the above shapes have regular opportunities to mature early, returning both capital and income (the ’auto call’ feature).

To be economically viable, the minimum investment size tends to be USD/GBP 10,000 The first two are structured growth products:

Product A

This is a six-year investment linked to the Australian, Chinese, Taiwanese, and Spaniard indices, which trades by January 26, 2021. The investment will autocall if all underlyings are at or above the trigger on any semi-annual observation date (including the Final Observation date). 

In this case, you will be paid the initial capital plus the coupon for each six months. 

If it does not autocall, if all underlyings are at or over 60% on the final observation, full capital is returned, and if they are below 60%, capital return will be reduced on a 1-1 basis.

The coupon rates are 5.75% if you invest in GBP and 7.50% if you do it in USD (semi-annually)

Product B

There's a 3 year Oil & Gas Sector Quarterly autocall, which trades by January 13, 2021.

The underlying is an SPDR S&P Oil & Gas Exploration and Production ETF.

It gives exposure to the sector with downside protection. The note will pay GBP 3.00%/USD 3.25% quarterly GBP 12.00% p.a./USD 13.04% p.a. if the underling is at or above its strike level. The opportunities for the note to call are every 6 months.

If it calls, the accumulated coupons will be paid. This note has a deep final level capital protection barrier at 60%.

Meaning the underlying can fall by up to 40% on the final observation date and the full capital will be returned.

The other three products are structured income products:

Product C

This is a six-year investment linked to the Australian, American, Taiwanese, and Spaniard indices. It trades by January 27, 2021. If the underlyings are at 85% of their initial levels or more on the semi-annual observation dates, the income will be paid plus previously missed payments. It will autocall and mature early if all underlyings are equal or above the trigger on any semi-annual observation date after the first year. 

This note has the added benefit of a reducing auto call trigger level, reducing by 2.5% every 6 months.

This increases the probability of the note maturing early.

If this happens, full capital is returned. If not, the investment continues until the final observation date. If the underlying are at or above 65%, then the full capital is returned. If not, they are returned 1-1. The memory income rate is 4.10% in USD (semi-annually).

Product D

This product is linked to Australia, UK, Spain and Taiwan. It trades by January 18, 2021. However, the autocall has a defensive trigger level of 95%, which means even if all of the indices fall by up to 5% from their initial strike level on an observation date the note will still call.

The income trigger is 75%. The memory income rate is 2.50% if in GBP and 3.00% if in USD (semi-annually).

Product E

This product is linked to four US technology stocks with a maximum term of four years. It trades by January 19, 2021.

If the closing levels of the underlyings are at or over 50% of their initial levels on any quarterly observation dates, the income, and any previously missed income payments will be executed. The investment will auto call and mature all underlyings above the trigger on any quarterly observation date after the first six months. In this case, full capital is returned. If not, the investment will continue until the final date (four years from the investment). 

At this point, if all underlyings are at or over 50% of their original levels, full capital is returned. If any of them is under 50%, the capital will be returned 1-1.

The memory income rate is 3.80% per quarter if in GBP (15.20% p.a.) and 4.00% per quarter (16.00% p.a.) if in USD.

Disclaimer: The information contained in this article is for informational purposes only and does not constitute financial advice or recommendations. Investing in financial products or cryptocurrencies involves risks, and you should be aware of the potential risks involved before investing. The content on this website is not intended to be a solicitation or offer to buy or sell any financial products or services. The information provided does not take into account your specific investment objectives, financial situation, or needs, and should not be relied upon as a substitute for professional financial advice. You should seek independent advice from a financial advisor or other professionals before making any investment decisions. Please be aware that the legal status of cryptocurrencies and other financial products may vary in different jurisdictions and may be subject to regulation. It is your responsibility to ensure compliance with any relevant laws and regulations governing the sale and marketing of financial products and services in your jurisdiction.

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