Using structured products to protect your portfolio

These notes generally serve their purpose best in times of no or mediocre equity growth.

While equities are the preferred asset class for long-term growth, there are times when it is clear that they are facing headwinds. Be it after an extended period of strong returns when you feel sure that something’s got to give, or in the midst of a crisis with a continuing, unknown impact on markets, sometimes you just “know” that shares are riskier in the short- to medium term than their long-term results may suggest. At times like these, structured notes can be used to provide more stability to your portfolio.

These notes generally serve their purpose best in times of no or mediocre equity growth. Depending on the particular note, you may also have some protection in falling markets. There is a wide variety of products available. I will try to highlight some of the main features and important terminology you need to understand before selecting the note that is right for you.

At the end, I will show an example to help make it all clearer.

Issuer risk

The single biggest risk lies with the issuer of the note, usually a bank. All banks have both local and international credit ratings and the higher the rating, the safer your investment. A bank may have a strong local rating, but a relatively poor international rating. Ask the issuer whether the rating they publish is the local or international rating. It is safer to look at the international ratings of the various products to ensure that you compare apples with apples.

Underlying assets

A structured note is tied to an underlying asset, or basket of underlying assets. It can be almost anything from shares or commodities, to indices and funds. Your note may for example, be tied to the share prices of Facebook, Apple and Netflix. Check whether the product is monitoring the worst, best or average of the underlying assets. The example below will make this clearer.

Also note the strike date of the investment. This is the starting point of your investment and the price of the underlying assets is fixed on this date. All future observations will compare back to the valuation of the assets on the strike date.


The return on your note may be expressed as either a fixed coupon, or alternatively an enhanced participation (often capped) in the growth of the underlying assets. In the case of a fixed coupon, the terms of the note will clearly explain exactly when the coupon vests and whether it has “memory”. The memory feature means that your coupon will continue to accrue from periods when it may not have triggered. More about this when we discuss the investment term.

An enhanced participation means that you will receive a multiple of the return that the underlying asset has achieved, for example “400% capped at 20%”. If the underlying asset grows by 18% during the investment term, the investor will receive 72%. Importantly, if the underlying asset grows by 30% during the investment term, the investor will receive a maximum of 20% x 400% = 80%.


The note will have a set maximum term. The issuer may add an autocall feature to the investment. This means that the issuer will evaluate the status of the investment at pre-determined observation dates. If all the criteria are met, the note will autocall (mature early) and investors will receive their total returns accrued to date, plus their initial capital.

Downside protection

Structured notes often include a degree of downside protection. At maturity, provided the underlying assets are above the pre-defined ‘protection barrier’, full capital is returned. For example: a capital protection barrier of 60% means that full capital is returned at maturity even if an underlying asset has lost up to 40% over the course of the product term. In this case, if at maturity an underlying asset is down by 50%, 50% of invested capital would be lost – as if you were invested directly in that underlying asset.

Let’s look at an example

You are invested in a balanced portfolio spread across various asset classes, which you feel is suitable for your risk profile in the long term. However, you note that you currently have around 20% of your portfolio exposed to technology stocks via your selected balanced fund. These stocks have made enormous gains over the recent past and you are concerned about your exposure to them. You can consider using a structured note with technology stocks as the underlying asset to provide some protection to your portfolio.

Bank ABC (AA1, AA+, AAA) offers a structured note with the following features:


(all, worst)

Returns Term Autocall observations Protection barrier Strike date




USD 17% p.a.

(with memory)

Six years Quarterly, from the end of quarter 1 65% 1 October 2020

At the end of each quarter, Bank ABC will check whether all of the above shares are at or above their strike prices. If they are, the product will autocall and investors will receive back their capital plus returns accrued for the quarter. If any of the underlying shares are not at or above their strike price, the product will roll over until the next quarterly observation date.

If you reach the end of the term, full capital is returned unless an underlying asset has lost more than 35%. In all other cases, invested capital is returned. If the worst-performing share is down by more than 35%, investors will receive back their capital less the performance of the worst underlying share.


Structured notes are a nice way to implement strategic medium-term protection in your investment portfolio, without completely deviating from your long-term strategy. Carefully analyze the marketing material to ensure you understand the specific terms and conditions of the product and ask your advisor to help you select the product most suitable within your overall portfolio before investing.

Was this article by Michael helpful?


Michael Haldane

Global & Local The Investment Experts


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”Having a little information is like being a little pregnant”

Leon Henderson American Economist (1895-1986

Thanks, it’s a very informative and helpful article – and it definitely surpasses my trading views: ”buy low, sell high”1

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