10.10.2018

Structured products to supplement your portfolio

Structured products are special investment instruments which can be configured flexibly. They can be aligned to suit investors, however they expect markets to perform. They can also be tailored to any risk profile. Put simply: if you buy shares, you’ll only turn a profit if prices rise. A structured product can even generate profit when stock market prices fall or stagnate.

Optimal flexibility thanks to structured products

Structured products are alternatives to direct financial investments, such as shares or bonds. Their flexibility comes from the fact that they combine a traditional financial product as an underlying (e.g. shares or bonds) with a derivative. New individual investment solutions are emerging to meet a wide range of market environments and scenarios, including challenging ones. Over 30,000 different structured products are listed in Switzerland, and new ones are being added all the time. Switzerland is also the largest market in the world for structured products in terms of investment volume.

The widespread view that structured products are high-risk is not true generally. The fact is that the structured products market is so big that it is difficult to keep track of it and to find the products which are in line with your own risk profile. The risk classes used by the Swiss Structured Products Association (SSPA) may help with this: the structured products are divided into six different risk classes, from low (comparable with money market investments) to very high (comparable with options). The risk is indicated by a number between 1 and 6, based on the value at risk (VaR). Transparent risk assessment makes it easier for investors to manage their risk in a targeted way. Leverage products, for example, generally entail greater risk and are therefore more suited to speculative investors, whereas the risk of capital protection products is similar to that of bonds.

Advantages: access to new markets and transparency

Structured products also provide easier access to asset classes, such as commodities and real estate or emerging regions into which only institutional investors would otherwise be able to put money. They also allow even small amounts of money to be invested in these asset classes.

Another benefit is transparency. For every market performance variant covered by the structured product, the amount paid out at the end of the term is determined when it is purchased. Success is therefore determined by market fluctuations and the creditworthiness of the issuer, rather than a manager’s expertise. On the other hand, depending on the product category, the additional costs (fees) tend to be high and sometimes lack transparency compared to other financial products. Depending on the product, the additional costs can nevertheless be lower than the fees for an actively managed fund, for example.

The issuer’s creditworthiness – a key criterion

From a legal point of view, structured products are obligations to be met by the product issuers. They bear liability with their full assets. This means the quality of a structured product is heavily dependent on the creditworthiness of the issuer. In contrast to funds, structured products are not classified as segregated assets which are legally separated from the issuer’s assets.

Structured products to diversity your portfolio

Look at structured products as a way of supplementing your portfolio. They present an opportunity to spread the risks of your investment more widely or to focus on specific areas in your portfolio. Investing solely in structured products is not advisable due to the risk involved. Find out in depth about the quality of the issuer and seek advice if you are inexperienced in investing in structured products.

This might interest you too