Structured products can contribute to portfolio diversification. Depending on their structure and prevailing market conditions, structured products may incorporate return and capital protection mechanisms, allowing a specific participation in market dynamics.
What is a "structured" product?
These financial products are called "structured" because they combine different financial instruments to create a unique structure: namely a base product (such as debt instruments, insurance products, or investment funds) together with one or more derivatives linked to one or more underlying assets (such as shares, bonds, indices, or yield curves). The aim of this structure is to benefit from the characteristics of the various instruments including the price movements of the underlying value.
Structured products carry the risk of partial or total capital loss during their term and in some cases at maturity.
Various mechanisms
Structured products generally rely on two main approaches:
- Return mechanism: structured products may employ one or more mechanisms to generate returns. These can be conditional (e.g. depending on the performance of the underlying asset, such as a stock market index, a share, or an interest rate) or unconditional.
- Capital protection mechanism: structured products may offer investors full or partial capital protection at maturity. In some cases, besides the issuer, another entity may offer a capital guarantee to support the reimbursement by the issuer. In unfavourable market conditions, this can ensure that the investment is wholly or partly preserved.
Key features
- Customized product: the structure can be tailored to provide a specific combination of potential return and risk protection. Investors can select parameters such as maturity, underlying asset, risk level, and types of mechanisms.
- Access to complex strategies: the product structure can be complex, incorporating advanced financial instruments such as options, swaps, and other derivatives. This allows investors access to strategies that might otherwise be unavailable.
- Specific objectives: a structured product can be designed with very specific features, such as capital protection, returns linked to a stock market index, or conditional payouts triggered by a market event. Depending on the intended objectives, the tax treatment of the product will also be specific.
- Diversification: structured products enhance portfolio diversification by adding risk-return profiles distinct from traditional financial assets such as equities and bonds.
- Performance when the underlying value rises, falls or stagnates: opportunity for an investor to generate returns from all possible fluctuations in the underlying value.
Main risks
- Complexity: the structure may be complex and require a thorough understanding of the financial mechanisms involved.
- Market risk: the product is exposed to fluctuations in the underlying asset's value. A significant decline could lead to losses.
- Credit risk: the risk that the issuer and, if applicable, the guarantor fail to meet their obligations.
- Liquidity risk: selling a structured product before maturity may be difficult and could result in losses.
- Currency risk: for example, if a structured product is denominated in US dollars and converted into euros at maturity, exchange rate movements may affect returns.
Innovative financial techniques are often used in the creation of structured products to address the needs of modern asset management, including risk management and return optimisation.
Your objectives, our solutions
Explore Degroof Petercam's structured products, carefully designed to support informed investment decisions in a constantly evolving market environment.
DISCLAIMER
Before investing in structured products from Degroof Petercam, you should carefully read the full legal documentation of the concerned product, paying particular attention to the section on risks. It is also essential to review the Key Investor Information Document (KID) in full to make a well-informed investment decision.