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What are Protection-Focused[1] Structured Solutions?

Protection-focused1 structured solutions may provide a higher degree of capital preservation combined with the opportunity to participate in the price appreciation of the underlying asset.

A structured note is a debt obligation that combines a zero-coupon bond with an options package to create a single investment security. This single security enables investors to seek a predetermined payout profile linked to the performance of a separate and unrelated underlying asset. An investment in public equities, through indices, ETFs, single stocks, commodities, or currencies can be accessed via a structured solution, which may expand an investor’s opportunity set and potentially provide certain benefits associated with alternative investments.

We previously discussed growth-focused structured notes, which may provide enhanced return and downside risk mitigation, and yield notes, specifically with contingent features that seek not the price appreciation of the underlying to provide return, but rather the creation of a contingent income stream. Now let’s move on to focus on capital preservation, these instruments are referred to as protection-focused1 structured solutions. In terms of potential principal protection1, yield notes and growth notes typically offer certain tools such as barriers and buffers that establish a threshold against the price change of the underlying asset, protection-focused1 structured solutions may offer a higher degree of pre-determined capital preservation and may provide FDIC insurance up to applicable FDIC limits.

An investor considering an investment in protection-focused1 structured solutions should carefully review any materials describing such a product, and its risks, including but not limited to the following specific risks:

  • market risk

  • call and reinvestment risk

  • credit risk

  • FDIC insurance subject to limitations

  • interest rate risk

  • illiquidity risk

  • capped return

  • no direct ownership of the underlying assets

  • returns may underperform the broader market

  • tax considerations

  • origination costs

If you would like to learn more about protection-focused1 structured solutions, the deep dive of this article is available by logging into the CAIS Platform.

Authored by

Nicholas Reade
Nicholas Reade

Investment Strategy Analyst | CAIS

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Footnotes

  1. All payments at maturity are subject to the creditworthiness of the issuer; investors may lose some or all of their initial investment.

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