What are Structured Products?
Structured products are versatile instruments. Not just for speculation, but more importantly to enhance returns or hedge a portfolio. Investors can position themselves for rising, falling or even sideways movements. Therefore, structured products offer solutions for many market environments and can be adapted to investors’ market expectations. The ability to tailor investments to the expectations of investors is one of the most important advantages of structured products. As a result, structured products offer an interesting alternative to investing directly in the underlying(s).
But what exactly is a structured product?
Structured products are innovative investment instruments, which consist of at least one underlying and a derivative component. The combination of different investment instruments is referred to as «structuring».
Structured Products for every portfolio
Precisely this combination of underlying(s) and derivative component allows the replication of different risk profiles and investor preferences. Accordingly, a suitable product can be structured for every market situation – up, down or sideways – and every risk profile.
Structured products that are geared towards rising prices increase in value if the price of the underlying rises. The opposite is true for products that are geared towards falling prices, as they increase in value when the price of the underlying falls. Additionally, products can be structured in such a way that they benefit from prices moving sideways. The performance of the underlying is an essential element for the performance of the structured product.
What serves as the underlying for structured products?
Structured products are based on an underlying. The underlying is the financial instrument that the product refers to. A wide range of asset classes such as stocks, commodities, currencies, indices etc. can serve as an underlying.
What types of Structured Products exist? An Overview:
As explained previously, there are suitable products for every risk profile and market expectation. In general, the risk-return relationship is as follows: taking higher risk is associated with higher potential returns.
Capital Protection Certificates
When it comes to limiting losses as closely as possible, products with capital protection can be considered. The special feature is that they guarantee a minimum repayment of the invested capital while limiting or even eliminating losses of the underlying. Often, the potential profit is limited. Capital Protection certificates are suitable for risk-averse investors.
Yield Enhancement Certificates
In Switzerland, yield enhancement certificates belong to the most popular products. They offer an attractive alternative to investing directly in the underlying(s). The ideal environment for yield enhancement certificates are sideways moving markets, as it is possible to achieve attractive yields in such phases. Additionally, these products offer a (slight) buffer from falling prices of the underlying(s). On the contrary, the upside return potential is capped.
With participation certificates, investors can participate 1:1 in the performance of the underlying. For investors, this means that they can participate in the performance of indices or specific themes.
With leverage products, investors can participate disproportionally in the performance of the underlying as less capital is required. Investors can bet on rising or falling prices.
What are the advantages of structured products?
Suitable for any market environment: Due to their diverse characteristics and different features, structured products offer solutions for any market environment. No matter if investors expect rising, falling or sideways moving markets, structured products enable attractive returns for any market environment.
Every risk appetite covered: In the world of structured products, there is a solution for every investor type. For investors who are willing to take on more risk or investors who are more risk averse. This is not always the case with conventional investment instruments.
Access and Trading: Structured products are usually listed on the exchange and thus easily tradeable. Retail investors can also invest in asset classes that are not usually accessible. Additionally, investing in structured products often requires less committed capital than conventional financial investments. Investors also do not need an account with Bank Vontobel to purchase our structured products. Investors can instruct their bank to place an order.
Transparency: From the start, a structured products payoff profile is clearly defined for every scenario and the performance of the underlying. Therefore, investors know what they will receive at maturity, in accordance with the relevant scenarios.
What are the risks of Structured Products?
Market risk / change in value: It is possible that the value of the certificate can fall significantly below the purchase price during the product term if the underlying moves in an unexpected direction.
Issuer- / Credit risk: Investors are exposed to the risk that the issuer might be unable to fulfil its obligations in respect of the product – e.g. in the event of insolvency (inability to pay / over indebtedness) or an administrative order of resolution measures. In case of a crisis of the issuer such an order can also be issued by a resolution authority in the run-up of an insolvency proceeding. A total loss of your capital invested is possible. The product is a debt instrument and as such is not covered by any deposit protection scheme.
What is a derivative?
The term derivative originates from the latin term “derivare” which translates as “derived”. In finance, derivatives are financial instruments whose value is derived from the price of the underlying.
Is there a minimum investment amount for structured products?
Minimum investment volumes per order are set by the custodian bank. In theory, for leverage products, an investor can purchase one unit to whatever price is available, without their being a minimum purchase value. If this is sensible in relation to the transaction costs, must be weighed up by the investor. In contrast, investment products (e.g. a Barrier Reverse Convertible) are issued with a nominal value. Usually, investment products are issued with a nominal value of 1’000, 5’000, 10’000 of a relevant currency. The nominal value corresponds to the minimum investment per product.
Can Structured Products issued by Vontobel be purchased without having a Bank Vontobel account?
To subscribe (primary market) or purchase (secondary market) a structured product an account with Bank Vontobel is not required. Investors can purchase these products at their bank. To give up an order, investors can instruct their advisor while mentioning either the Valor, ISIN or Symbol of the relevant product.
Who are Structured Products suitable for?
Structured products are tradable instruments that allow retail investors to invest in products with interesting features, enable investments in markets that are not easily accessible or to benefit from short-term opportunities. In general, a portfolio can be complemented with the inclusion of structured products. Many different categories of structured products with different risk-return profiles exist. The choice of structured product depends on the market expectations and the risk appetite of an investor.
Do the trading hours of the product and the underlying always coincide?
It is possible that the trading hours of products and their underlying(s) differ. This is especially the case for foreign underlyings, commodities, foreign exchange and interest rates (bonds). For example, foreign exchange is traded 7 days a week and 24 hours a day, but trading hours for a product with foreign exchange as an underlying is limited to the trading hours of the products exchange.
Can Leverage products only be traded on exchange or is it possible to trade off-exchange?
Depending on the exchange, leverage products can also be traded off-exchange including during extended trading hours. Vontobel is an official partner of Swiss DOTS, an over the counter (OTC) market by Swissquote for leverage products. Swiss DOTS allows investors to trade off-exchange and benefit from extended trading hours – weekdays from Monday to Friday from 08.00 to 22.00 CET, particularly interesting for foreign stocks.
Where can investors find subscription and recently issued products?
On our website, both products in subscription and recently issued can be viewed. For investment products, subscription products can be viewed here. For recently issued investment products, products issued in the last 14 days are displayed and can be viewed here. For recently issued leverage products, products from today and the previous day are displayed.
Can the investor be subject to a margin call?
Contrary to trading on derivatives markets (e.g. futures contracts) investors are not subject to margin calls. The maximum loss is limited to the invested capital.