Safe Money Mindset Newsletter: Structured Notes – Tailored Investments for Unique Goals

Welcome back to the Safe Money Mindset Newsletter!

Last week, we explored Buffered ETFs, a tool for balancing risk and reward in volatile markets. This week, we’re taking a closer look at Structured Notes, a unique investment tool designed to align with specific goals. Often considered one of the more complex offerings in the financial world, Structured Notes combine traditional investments with derivatives to create customized outcomes for investors. Let’s break them down into simple terms and explore how they might—or might not—fit into your financial plan.

What Are Structured Notes?

Structured Notes are hybrid investments issued by financial institutions. They combine a fixed-income component (like a bond) with a derivative (an investment linked to the performance of another asset, such as a stock index, commodity, or currency).

This blend allows Structured Notes to deliver tailored outcomes, such as:

• Enhanced returns if certain conditions are met.
• Protection against partial losses.
• A mix of income and growth potential.

How Do Structured Notes Compare to Buffered ETFs?

While both Structured Notes and Buffered ETFs are designed to manage risk and reward, they have key differences:

• Customization: Structured Notes are highly customizable, offering more tailored solutions compared to Buffered ETFs, which have pre-set buffers and caps.
• Liquidity: Buffered ETFs trade on stock exchanges, making them more liquid, while Structured Notes are typically held to maturity.
• Issuer Risk: Structured Notes carry the credit risk of the issuing institution, whereas Buffered ETFs involve no direct issuer risk since they are exchange-traded.

Both tools rely on derivatives to achieve their outcomes, but their structure and accessibility cater to different types of investors.

How Do Structured Notes Work?

Think of Structured Notes as a “design-your-own-investment” tool. You can customize elements like:

• Underlying Asset: Choose from a stock index, commodity, or other benchmarks.
• Risk/Reward Balance: Define your level of protection against losses or caps on gains.
• Time Horizon: Select a specific maturity date, typically ranging from 1 to 5 years.

The payout depends on how the underlying asset performs relative to the terms defined in the note.

Examples of Structured Notes in Action

Here’s a simple example: Imagine a Structured Note linked to the S&P 500 with these terms:

• You’ll receive a 10% return if the index gains up to 15%.
• If the index loses value, you’re protected against the first 10% of losses.
• However, if the index falls more than 10%, your losses match the market.

It’s important to note that Structured Notes come in many varieties, and this example is just one possibility. The key is understanding the specific terms of each note.

Who Should Consider Structured Notes?

Structured Notes are typically designed for experienced investors who:

• Have specific income or growth goals.
• Are comfortable with limited liquidity (Structured Notes are usually held until maturity).
• Want to add a customized element to their portfolio.

Pros and Cons of Structured Notes

Pros:

• Highly customizable to fit specific investment goals.
• Can offer downside protection or enhanced income potential.
• Access to unique markets or asset classes.

Cons:

• Limited liquidity—selling before maturity can be challenging.
• Complex structure requiring careful analysis.
• Dependent on the creditworthiness of the issuing institution.

Key Takeaways

Structured Notes can be powerful tools for investors seeking tailored solutions. However, they require a clear understanding of their terms and risks. If you’re considering adding Structured Notes to your portfolio, it’s essential to consult a financial professional to ensure they align with your goals.

Next week, we’ll be diving into REITs (Real Estate Investment Trusts)—a straightforward way to invest in real estate without the headaches of being a landlord. Stay tuned!

Warmly,

Jeff Perry

Partner, Quest Commonwealth

Co-Host of "Safe Money Mindset" on WXYZ-TV ABC

Detroit Author of "Safe Money Mindset" – Available on Amazon or DISCOUNTED HERE

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Weekly Tip

Curious about Structured Notes? Review your financial goals and risk tolerance to see if this tailored strategy could fit into your plan. Not sure where to start? Go to our website to schedule a free consultation to explore your options and make informed decisions!

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Jeff Perry is an Investment Advisor Representative registered with Foundations Investment Advisors, LLC, an SEC-registered investment adviser. Investments include the risk of loss, including the loss of principal.