September 2025 Economic and
Investment Update

What Are Structured Products?

Structured products sound complicated, but the core idea is simple: they are financial instruments that combine traditional investments (like bonds) with derivatives (such as options). By packaging these elements together, issuers can create specific risk–return profiles designed to meet various investor needs.

Think of them as custom investment recipes. Instead of buying plain stocks or bonds, you’re buying a tailored blend: the bond component provides stability or income, while the options create conditional features such as extra yield or limited downside protection.

Structured products are not a standalone “asset class.” Rather, they are tools that reshape exposure to existing asset classes like equities, currencies, interest rates, or commodities depending on how they’re built.

Why Investors Use Structured Products

Investors purchase income-oriented structured products primarily to enhance yield. For example, when traditional bonds pay little interest, structured notes can offer higher, more attractive interest payments.

Beyond yield, these products can also:

1. Tailor outcomes – align payoffs with personal goals, such as steady income or partial protection against market declines.

2. Diversify sources of return – instead of relying solely on dividends or bond coupons, investors receive income generated through derivative structures.

3. Match liabilities – institutions such as pension funds often use structured products to design cashflows that mirror future obligations.

In short, they allow investors to customize the balance between income, protection, and risk in ways that traditional securities cannot.

Who Issues Structured Products?

The providers, known as issuers, are usually large financial institutions such as investment banks, retail and private banks, and specialist boutiques

Because the issuer is responsible for making payments, investors also bear credit risk of the issuer. Therefore, our mandate is to work with the biggest banks and AAA rated banks.

The Upsides: Why Investors Are Interested

1. Higher Income Potential: Yield-enhancing structures can offer income far above what’s available from government or investment-grade bonds.

2. Customization: Investors can choose products with maturity profiles, payout conditions, and protection levels that fit their goals.

3. Portfolio Role: They can provide exposure to markets or strategies that may be difficult or costly to replicate using traditional securities.

4. Diversification of Payoff Patterns: Structured products generate returns that don’t always move in lockstep with equities or bonds, offering alternative risk–return profiles.

The Downsides: What Investors Must Weigh

Like any financial instrument, structured products involve trade-offs. Key risks include:

1. Market Risk: Income is often conditional. If the underlying reference (an index, stock, or rate) falls below a barrier, coupons may stop, or capital could be at risk.

2. Complexity: While the payoff is described in a formula or diagram, the conditions can be difficult for everyday investors to fully grasp.

3. Liquidity Risk: Unlike widely traded stocks or ETFs, structured products may not be easy to sell before maturity. Secondary market pricing can be unfavorable.

4. Issuer Credit Risk: Payments depend on the issuing bank’s solvency. Even if the market performs, an issuer default could wipe out returns.

At the end of the day, higher yield does not come free. Investors must accept certain conditions and risks in exchange for higher income.

How to Think About Structured Products in a Portfolio

Structured products should not replace traditional bonds or equities but can complement them. Used thoughtfully, they can:

1. Boost portfolio income in low-yield environments.

2. Provide tailored exposures that align with investor views (e.g., expecting moderate market growth rather than sharp rallies).

3. Make portfolio returns more predictable

However, they require careful due diligence. Investors should fully understand the payoff conditions, the worst-case scenarios, and the credit quality of the issuer.

Final Thoughts

Structured products sit at the crossroads of innovation and complexity. For investors seeking income, they can be a powerful tool to generate yield that traditional bonds no longer provide. But they demand discipline and require an understanding of the mechanics, knowing the issuer, and recognizing the risks.

Bonus Reading:

If you like numbers and want to nerd out on how income-producing structured products work, below is a basic example:

Structure

– Underlying Index: S&P 500

– Coupon: 10% annually, paid monthly (≈0.83% per month)

– Tenure: 3 years

– Non-call period: 6 months

– Auto-call: On monthly anniversary date after 6 months.

– Barrier: 70% of initial index level (principal protection threshold).

– Principal at maturity: 100% principal returned if final index level is at or above 70% of the index’s value on the date of issue.

How It Works

1. Monthly Income

– Investor earns 0.83% per month as long as the S&P 500 is ≥70% of its initial level on observation dates.

– If the index is below 70%, no coupon is paid for that month.

2. Auto-Call

– Starting from month 7, if the index closes ≥100% of initial level at an observation date, the note is auto-called.

– Investor receives full principal plus all coupons up to that point. The note ends early.

3. Maturity Redemption (if not auto-called)

– After 3 years, if the index is ≥70% of initial level, investor gets full principal plus all monthly coupons received.

– If the index is <70% at maturity, then and only then does the investor suffer a capital loss, in line with the index decline.

Example Scenarios

Scenario 1: Market Rises Early

– At month 8, S&P 500 = 105%.

– Note auto-calls.

– Investor receives ~6.6% income (8 months of coupons) plus full principal.

– Outcome: ~106.6% total.

Scenario 2: Sideways Market

– Index never reaches 100% again but stays above 70%.

– Note runs full 3 years.

– Investor collects 10% annually = 30% over 3 years.

– Full principal returned.

– Outcome: 130%.

Scenario 3: Market Down 25% at Maturity (Index = 75%)

– Index above 70% barrier at maturity.

– Investor still receives full principal and all coupons.

– Outcome: 130%.

Scenario 4: Market Down 40% at Maturity (Index = 60%)

– Barrier breached at maturity.

– Investor receives redemption value linked to final index level: 60% of principal.

– Coupons may have stopped once index fell below barrier, but let’s assume 12 months of coupons (10%) were earned before the breach.

– Outcome: ~70% total.

Final Takeaway

1. Income flows monthly as long as the S&P 500 remains above the 70% barrier.

2. Early auto-call can return principal plus coupons quickly if markets are strong.

3. Capital loss only occurs if, after 3 years, the index finishes down 30% or more.