Wrappers
Structured product wrappers are investment vehicles designed to provide a combination of capital protection and market exposure. They typically combine a debt instrument, such as a bond, with a derivative component, which provides the potential for enhanced returns based on the performance of an underlying asset, such as stocks, indices, or commodities.
These products are often customised to meet the specific risk and return preferences of investors. The wrapper's features can vary widely, but they generally include the following components:
Capital Protection: Many structured products offer varying levels of capital protection, ensuring that investors receive some or all of their principal investment back at maturity, depending on the performance of the underlying asset.
Participation Rate: This refers to the percentage of the underlying asset's performance that the investor will benefit from. For instance, a structured product may offer a participation rate of 80%, meaning the investor captures 80% of any positive appreciation in the asset's value.
Underlying Assets: Structured products can be linked to a variety of underlying assets, including equities, fixed-income securities, currencies, or commodities. The choice of underlying asset affects the risk profile and potential returns of the product.
Maturity Period: Structured products typically have a fixed maturity date, which can range from a few months to several years. The length of the investment period can impact the return and the risk level.
Market Conditions: The performance of structured products can be significantly influenced by market conditions and the volatility of the underlying assets. Investors should be aware of these elements when considering such investments.
Structured product wrappers are often issued by financial institutions and can be marketed to both retail and institutional investors. However, they can be complex and may carry specific risks, including credit risk associated with the issuer, liquidity risk, and limited transparency in how the returns are generated. Thus, it is crucial for investors to conduct thorough research and understand the intricacies of these products before investing.
Some examples of wrappers
Here are some examples:
Structured Deposits: These are debt instruments that guarantee the return of the principal amount invested at maturity, along with potential returns linked to the performance of an underlying asset, such as an equity index or commodity. Despite being a structured “deposit”, it is considered an investment product (and not a deposit), and the capital becomes an unsecured credit of the issuer (unlike actual, traditional deposits).
Market-Linked Debentures: These are fixed-income securities where the payout at maturity is linked to the performance of an underlying market index, offering enhanced returns based on market performance.
Equity-Linked Notes (ELNs): These are structured products that offer a return based on the performance of a particular stock or a basket of stocks. Investors may receive periodic coupon payments and a final redemption linked to the underlying equity performance.
Constant Proportion Debt Obligations (CPDOs): These structured products seek to provide investors with regular income while maintaining exposure to credit risk. They use leverage and derivatives to adjust the exposure to underlying assets dynamically.
Credit-Linked Notes (CLNs): These are securities that offer investors debt claims with returns that depend on the creditworthiness of a referenced entity or index. They often include built-in credit protection features, transferring some credit risk to the investor.
Buffered Notes: These products offer downside protection within a predetermined range. If the underlying asset declines beyond the buffer level, the investor may face losses, but returns are enhanced if the asset performs well.
Yield Enhancement Products: These structured products aim to provide investors with higher yields than traditional fixed-income investments by using derivatives to manage risk while exposing the investor to potential market volatility.
Each of these wrappers can be tailored to meet different risk appetites and investment strategies, making them versatile options for enhancing portfolio performance.