Investing in Structured Notes Birmingham AL

Structured notes have emerged in recent years as a new, exciting investment opportunity quickly being absorbed into the mainstream financial services industry. $64 billion in structured products were issued in the U.S. in 2006, a 33 percent increase from 2005, according to the Structured Products Association. It is speculated that the structured products market will break $100 billion in 2007.

Structured notes should not be confused with other investments that have been hit hard by the credit crunch and subprime mess, including collateralized debt obligations and structured investment vehicles. Structured notes are financial instruments that combine derivatives with equity or fixed income, resulting in customized risk and return profiles.

Because profiles can be structured to match any investor’s comfort zone, the notes offer a way of investing in an asset class that would otherwise seem too risky, Bob Gordon, president of Twenty-first Securities, said. Some types of structured notes, such as exchange-traded notes (ETNs), are favorable from a tax standpoint as well. ETNs—which are distinct from exchange-traded funds (ETFs)—may be tax-deferred until they are traded or reach maturity. Additionally, ETNs that are held for longer than a year receive long-term gain treatment.

“I think there are tax advantages to the capital gains treatment in the structured notes which can’t be matched by other investments that are out there,” Gordon said.

Some consumers have bought structured notes without necessarily knowing it in the form of a certificate of deposit (CD), Gordon said. A CD that yields returns based on a specific market, such as Everbank’s Gold Bullion CD (see our article on Investing in Gold and Silver CDs for more information), is a form of principal-protected structured note, where the principal is guaranteed at the time of maturity, regardless of market performance. In exchange for the reduced risk inherent in principal protection, an investor may also face lower potential for return, depending on the note structure; in some cases, he or she will not be able to acquire dividends and interest or keep a full percentage of capital gains.

Structured products are a diverse type of investment; while principal-protected notes are perhaps the simplest form of structured investments, structured notes that do not guarantee principal are far more common and complex, Gordon said.

JPMorgan, for instance, sells buffer zone investments and return-enhanced investments in addition to principal-protected notes. Buffer-zone investments protect a percentage the principal; there is potential for higher returns, usually with a limit on maximum gains. Lastly, return-enhanced investments do not guarantee any principal, but offer the potential to double or triple market returns within a limit on maximum gain. 

The types of structured notes that are available vary according to an individual investor’s qualifications.

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