Structured Products: Balancing Returns and Capital Protection
You’ve probably heard of structured products without really knowing what they are. Yet these investments are becoming increasingly common in life insurance policies, PERs, and wealth management offerings from banks. What do they promise? To seek returns while, in certain situations, limiting exposure to the financial markets. They generally work based on several
elements: a reference financial asset (called the underlying asset), predefined performance conditions, and a fixed investment term. Here are the key points to remember:
The return depends on the performance of one or more underlying assets (stock index, stock, basket of stocks, etc.);
Some products offer partial or full principal protection at maturity;
The level of risk varies depending on the product's structure and the issuer's financial strength;
Before investing, it is essential to analyze the repayment mechanisms and adverse scenarios.
What is a structured product?
Structured products have been around for several decades and are now widely used in wealth management. However, investors often still do not fully understand how they work.
Definition of a Structured Product
A structured product is a financial investment whose return depends on the performance of a financial asset known as the underlying asset. It may be:
What sets it apart is that it defines the terms for returns, redemption, and, in some cases, capital protection from the outset. Investors therefore know the key features of the investment in advance:
the market scenarios under consideration;
and the conditions under which he will be able to receive a return.
In other words, when you invest in a structured product, you are not directly buying an index or a stock. You are investing in a product whose return will depend on how a predefined scenario unfolds.
What kind of investors are they targeting?
Structured products are primarily intended for investors who wish to diversify their portfolios without taking on the exact same level of risk as an investment in stocks. They may be suitable for:
to investors who have already set aside emergency savings;
for investors looking for options that fall between euro-denominated funds and
the stock market.
On the other hand, they are generally not suitable for people who want to withdraw their money at any time or who prefer the simplest investment options.
How does a structured product work?
Even though each product has its own characteristics, they often operate on the same principles. Once you understand these mechanisms, it becomes much easier to interpret them.
A mechanism based on predefined conditions
A structured product operates according to a scenario that is known at the time of purchase. Before investing, the investor generally knows what conditions must be met in order to:
These terms are based on the performance of an underlying asset as measured on various dates specified in the contract. Depending on the results, the product may be redeemed at maturity or, in some cases, early.
Good to Know
Some products also include an early redemption feature, often referred to as an “autocall.” When the specified conditions are met on a review date, the product may be redeemed before its original maturity date, with the return specified in the formula.
A concrete example of a structured product
Let’s take the example of a structured product linked to a European index.
The contract provides for:
a maximum term of eight years;
a potential return of 8% per year;
capital protection in the event of a decline of up to 40% in the index at maturity.
If the index rises or remains stable, the investor can receive the expected return.
If the index falls but remains above the protection barrier, the principal may be repaid.
However, if the decline exceeds 40%, the investor bears a portion of the loss.
Good to Know
The investment scenarios are detailed in theKey Information Document (KID) , which is provided to investors prior to any subscription.
The subscription window: a distinctive feature of structured products
Unlike a traditional fund or an ETF, which you can buy at any time, a structured product is generally only available for a limited period. This is referred to as the subscription window.
This period often lasts a few weeks and corresponds to the product’s launch phase. Once this window closes, it is no longer possible to invest in the product under the originally specified terms.
What are the benefits and risks of structured products?
Like any investment, structured products have advantages, but also limitations that should be taken into account before making a decision.
The Main Benefits
The first advantage is the transparency offered to investors. The terms of the investment are known at the time of purchase: investment term, potential return, redemption terms, and risk level.
Structured products also offer:
a maximum term of eight years;
a potential return of 8% per year;
capital protection in the event of a decline of up to 40% in the index at maturity.
to seek returns even in sluggish markets.
Limits You Should Be Aware Of
Structured products remain more complex investments than a euro fund or a traditional bond. Before investing, it is essential to understand:
Furthermore, these investments are generally designed to be held until maturity. Even when early redemption is an option, recovering your principal before maturity is not always advantageous.
Good to Know
As with any financial investment, the pursuit of returns involves taking on risk. Depending on the product’s structure, you may incur a partial or total loss of your invested capital.
How do you analyze a structured product before investing?
Two structured products may offer similar potential returns but carry very different levels of risk. Before making a decision, there are a few things you should check.
Examine the underlying asset
The underlying asset drives the product's performance. Before investing, ask yourself:
Is this a diversified index or a single stock?
Is the relevant market volatile?
What are the prospects for the sector or the companies in question?
Good to Know
A product linked to a single stock will generally be more sensitive to market fluctuations than a product based on a diversified index.
Understanding the Level of Protection
The terms “guaranteed principal” and “principal-protected” are often confused. Before investing, make sure to:
the exact level of protection provided;
the eligibility requirements;
situations in which a loss remains possible.
This information is generally included in the product's regulatory documentation.
Check the investment term
The term can range from a few years to more than a decade. Before investing, make sure your investment horizon aligns with that of the product.
Consider Issuer Risk
Issuer risk is often underestimated. However, even when a product offers principal protection at maturity, that protection depends on the issuing institution’s ability to meet its obligations. The issuer’s financial strength is therefore a key factor in the analysis.
Read the worst-case scenario
When an investor comes across a structured product, they often focus first on the advertised potential return. But the most interesting scenario to read is often the one that describes the worst-case scenario. That is what allows you to accurately gauge the risk involved. To avoid unpleasant surprises, it is advisable to consider all possibilities. This will enable you to more effectively assess the actual risk of the investment.
Structured Products or Traditional Investments: How to Choose?
Structured products do not serve the same purpose as a euro fund, an SCPI, or an ETF. While some investments prioritize safety or the pursuit of regular income, structured products aim to achieve a predefined performance scenario.
The choice therefore depends primarily on your investment horizon and your risk tolerance.
Good to Know
Structured products are often used to diversify a portion of a life insurance policy or a PER. They are generally not intended to constitute the entirety of an investment portfolio.