How can structured notes benefit investors?

PAID CONTENT

Many clients continue to put yield and downside protection among their long-term investment goals. Structured notes can provide either opportunity.

In fact, structured notes are suited for many types of markets and many kinds of clients. And that’s why these products are gaining traction among investors, accounting for about $93 billion¹ in invested assets (that is, structured notes and market-linked GICs) in Canada, according to Investors Economics.

Basically, structured notes are a subset of structured products. They are a debt instrument typically issued by banks and designed to give investors a certain level of downside protection. They offer a broad set of investment strategies, principal-protected or not.

Structured notes can be defined by 4 components: maturity, underlying asset, type and amount of protection, and payoff formula.

• Maturity – In most cases, structured notes maturities are between 2 and 7 years.

• Underlying asset – The performance of a structured note generally tracks the performance of an underlying asset—that is, an index, a stock, a basket of stocks, commodities, or foreign currencies—over the maturity period.

• Type and amount of protection – The amount an investor is protected against declines in the underlying asset. For principal-at-risk notes, as long as the underlying asset level isn’t below the protection level, the investor gets its principal (invested capital) at maturity, but losses can be incurred past this level. For principal-protected notes, the investor gets back at least its principal back at maturity.

• Payoff formula – The amount the investor receives over the term of the note if certain market conditions are met. There are 2 basic types of payoff structures: income and growth. Income payoff provides investors with a maximum return level limited to the aggregate of the coupon payments, fixed or contingent. Growth payoff gives investors a level of upside participation on the underlying asset.

When combined, these 4 components provide structured notes to take advantage of different market expectations or respond to specific investors’ needs.

Structured notes can be a beneficial addition to a portfolio. They can be used to either protect against or take advantage of specific market views. Their defined outcome and downside protection add customization and diversification to clients’ portfolios. Moreover, some clients will use them to play on investment themes tactically. In this situation, their attractiveness comes from the fact that the strategy would be hard and expensive to implement otherwise. 

Simplicity is key

With 3 decades of experience in the structured product space, Desjardins has become a key player, owning one quarter of Canada’s structured product market share. It’s the company’s focus on simple products that has contributed to its success: simple payoff formulas and simple types of protection. Meanwhile, the expansion of the product offering and the strength of the distribution network have earned Desjardins international awards since 2012 at structured products events, including the award for Best House, Canada in 2020 at the Structured Retail Products, Americas conference.

In summary, structured notes can add value to clients’ portfolios. Although these products are gaining traction in Canada, structured notes are still a niche product.  For these reasons, there is an opportunity for investors.

Frederick Tremblay Director, Equity Derivatives & Structured Products

To learn more about Desjardins Structured Notes, visit https://www.fondsdesjardins.com/structurednotes/market-insight/discover-desjardins-structured-notes/.

An investment in principal protected notes may not be suitable for all investors. Important information about principal protected notes is contained in the Information Statement and the Oral Disclosure Document of each note. Investors are strongly encouraged to carefully read this documentation related to a note issuance before investing and to discuss the suitability of an investment in the notes with their investment advisor or dealer representative before making a decision. The documentation related to a notes issuance in particular is available on the summary page of that issuance. In the event of any inconsistencies or conflicts between this document and the Information Statement, the Information Statement governs. The offering and sale of notes may be prohibited or restricted by laws in certain jurisdictions in Canada and notes are not offered for sale outside Canada. Notes may only be purchased in the jurisdictions where they may be lawfully offered for sale and only through individuals duly registered and authorized to sell them. Past performance is not indicative of future performance. The return on principal protected notes is dependent on the change (which may be positive or negative) in value of the underlying assets during the term of the note and it is possible that there may be no interest payable to the investor. The return on a note cannot be established before maturity. Some notes may be subject to caps, participation rates and other limits which feed through to performance. The full principal amount of a principal protected note will be repaid at maturity only. An investment in notes is subject to certain risk factors. Please read the Information Statement and Oral Disclosure Document for complete details, including the precise formula for determining return on a note.

An investment in non-principal protected notes may not be suitable for all investors. The notes differ from conventional debt and fixed income investments; repayment of the entire principal amount is not guaranteed (other than a minimum of 1% of the principal amount) and will be at risk. As a result, you could lose substantially all your investment in the notes. The notes entail downside risk and are not designed to be alternatives to conventional debt or fixed income investments or money market instruments. Important information about non-principal protected notes is contained in the Base Shelf Prospectus, the Prospectus Supplement and the Pricing Supplement (collectively, the “Prospectus”) of the notes. Investors are strongly encouraged to carefully read this documentation related to a note issuance before investing and to discuss the suitability of an investment in the notes with their investment advisor or dealer representative before making a decision. The documentation related to a notes issuance in particular is available on the summary page of that issuance. In the event of any inconsistencies or conflicts between this document and the Prospectus, the Prospectus govern. The offering and sale of notes may be prohibited or restricted by laws in certain jurisdictions in Canada and notes are not offered for sale outside Canada. Notes may only be purchased in the jurisdictions where they may be lawfully offered for sale and only through individuals duly registered and authorized to sell them. Past performance is not indicative of future performance. The return on non-principal protected notes is dependent on the change (which may be positive or negative) in value of the underlying assets during the term of the note and it is possible that there may be no interest payable to the investor. The return on a note cannot be established before maturity. Some notes may be subject to caps, thresholds, participation rates and other characteristics which may be reflected in the performance. Since the notes are not protected and the principal amount will be at risk, it is possible that you could lose some or substantially all of your original investment in the notes. An investment in notes is subject to certain risk factors. Please read the Prospectus for complete details, including the precise formula for determining return on a note.

¹ As at December 31, 2020. According to Investor Economics, Retail Brokerage and Distribution Report, Canada, Winter 2021, and Investor Economics, Deposit Advisory Service, Canada, Spring 2021.