Structured products: A new dimension in securities investment

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  Christian Ingerl
  Redaktor

Structured products have enriched the investment universe in many ways. On the one hand, they offer a high degree of flexibility. Investors can use them not only to profit from rising markets, but also to achieve respectable returns when prices are moving sideways or even falling. On the other hand, structured products can be used to manage risk in a targeted manner. For example, risk-averse investors can opt for solutions with capital protection, while yield-oriented investors can invest in yield-optimization, participation or leverage products. In this way, the investor’s own risk appetite and market expectations can be covered precisely.

What are structured products?

A structured product is a financial instrument that is made up of several components and whose return and/or repayment depends on the performance of one or more underlying assets. As a rule, a classic investment component (e.g. bond or money market instrument) is combined with one or more derivatives to create a specific risk
return profile.

“Structured products have significantly expanded the range of investment opportunities.”

Success story

Structured products began their triumphant advance at the start of the new millennium, around 25 years ago. Individual product types, such as warrants or discount certificates, had already existed before then. However, the real breakthrough came in the early 2000s. At that time, numerous new product types, including the popular reverse convertibles, saw the light of day and investor interest increased abruptly. The path was not without setbacks. In particular, the insolvency of Lehman Brothers in 2008 was a shock for the industry. Nevertheless, structured products are now considered an established asset class, with investors able to choose from a wide range of product types and thousands of underlyings.

Switzerland as an innovator

Switzerland is regarded as a pioneer and innovator in the field of structured products. One example of a Swiss invention is the default-protected COSI products, which have created new standards in investment security. There are also flexible solutions for current trends such as artificial intelligence, healthcare and cryptocurrencies. With an investment volume of around CHF 200 billion, Switzerland is now the world’s largest market for structured products. The variety of products on offer is enormous: the SMI underlying alone can be found on payoff.ch alone offers over 6,000 different products. In total, the Swiss investment universe comprises around 65,000 structured products of various types. The high level of acceptance and demand underline Switzerland’s leading role as a driving force for the entire industry.

Categorization

Structured products can be divided into different types according to their risk/reward profile. The Swiss Structured Products Association (SSPA) uses the following categorization:

• Capital protection products,
• Yield optimization products,
• Participation products,
• Investment products with additional credit risk
• and leverage products.

Capital protection

Capital protection products guarantee investors a repayment at the end of the term at least in the amount of the specified capital protection, which is usually shown as a percentage of the nominal value – around 100%. However, investors usually only benefit from rising prices of the underlying asset up to a price cap. In other cases, a coupon is paid out. Capital protection products are particularly suitable for risk-conscious investors who value security but still want to participate in potential price gains.

Yield optimization

Yield enhancement products were developed to provide investors with attractive returns even in sideways market phases. This type of product generally offers limited profit opportunities, but provides partial protection against losses if the underlying asset falls. However, there is still a risk of loss if the underlying falls below a certain threshold (strike) at maturity. The best-known yield-optimization products include discount certificates, reverse convertibles and barrier reverse convertibles.

“With an investment volume of around CHF 200 billion, Switzerland is now the world’s largest market for structured products.”

Participation

Participation products enable investors to participate in the performance of an underlying asset. As a rule, the product reflects the performance of the underlying asset on a one-to-one basis, taking into account the subscription ratio and possible fees. This gives investors a transparent and uncomplicated way of benefiting from price movements. These products are available with and without a maturity limit. Depending on the structure, investors can thus take advantage of short-term market opportunities or invest for the long term.

Lever

Leverage products enable investors to participate disproportionately in the price movements of an underlying asset with a small capital investment. This so-called leverage effect can result in both high profits and considerable losses, including total losses. Leverage products are suitable both for speculative strategies and for hedging existing positions. Due to the increased risk of loss, continuous monitoring of investments is essential. The two most important types of leverage are warrants and knock-outs.

Conclusion

Structured products offer numerous advantages and are therefore an attractive addition to a diversified investment portfolio. They enable customized solutions, offer various risk management options and open up new opportunities for returns. However, as with any form of investment, it is important to carefully examine the risks and costs before making an investment decision.