As investors look for products that balance risk and reward, structured investments have gained attention for their flexibility and customization. Among these, structured notes have become a popular option due to their versatility, blending the stability of bonds with the potential upside of market-linked returns. 

Discover how structured products work and their benefits to determine if structured notes are a good investment to include in your portfolio. 

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What is a structured note and how does it work?

A structured note is a hybrid product issued by banks and other financial institutions. It combines two key components: a debt security, typically a bond, and a derivative, like an option or swap. This combination lets investors get exposure to a wide range of underlying assets, including equity indexes, individual stocks, and commodities, while managing risks. Here’s how this works: 

• Principal-protected notes: In principal-protected notes, most of the investment is allocated to a traditional bond or debt instrument, designed to return some or all of the principal at maturity. The remainder is used to purchase a derivative tied to an underlying asset, which determines the note’s return based on that asset’s performance.
• Non-principal protected notes: The entire investment is linked to the performance of the underlying asset through derivatives or other mechanisms. There is no guarantee of principal, so investors assume full risk and potential losses. Variations include enhanced-return notes that offer greater upside exposure in exchange for more risk, and contingent-income notes that provide fixed payments if specific market conditions are met. 

6 types of structured notes

Structured notes come in a wide array of forms, each designed to achieve specific investment outcomes. Here are six of the most common types. 

1. Equity-linked

Equity-linked notes are the most prevalent form. Their performance is tied to the return of a stock or an index like the S&P 500. Depending on the design, they can offer principal protection, enhanced returns with a cap, and contingent income based on the equity’s performance. 

2. Commodity-linked

Commodity-linked notes track the performance of one or more commodities, such as oil, gold, and agricultural products. They offer indirect exposure to commodity markets without the need to manage futures contracts or physical assets, but returns can be volatile due to fluctuating prices. 

3. Currency-linked

Currency-linked notes generate returns based on changes in exchange rates between two or more currencies, such as the U.S. dollar versus the euro. They suit investors who are looking to capitalize on foreign currency movements or seeking to diversify their portfolio beyond traditional markets.

4. Interest rate-linked

Interest rate-linked notes are tied to movements in benchmark interest rates, such as London Interbank Offered Rate, Secured Overnight Financing Rate, or U.S. Treasury yields. Depending on the structure they may offer enhanced yields in certain rate environments and provide protection against rate increases or declines. 

5. Credit-linked

Credit-linked notes depend on the creditworthiness of a specific entity, such as a corporation or government. They typically embed a credit default swap, exposing investors to the risk of default. In return, they can often pay higher yields as compensation for this credit exposure. 

6. Notes categorized by payout structure

In addition to the underlying asset, issuers can also categorize structured notes based on how they generate returns:

• Growth notes: Designed for capital appreciation, often with a capped upside and a single payoff at maturity. 
• Income notes: Focused on generating regular coupon payments, usually with limited or no upside participation and varying degrees of principal protection.
• Digital notes: Offer a fixed return if they meet certain predefined conditions at maturity, like if the underlying assets stays above a specific level.
• Absolute return notes: Utilize derivative strategies to deliver positive returns as long as the asset stays within a predetermined range. 

Structured notes pros and cons

Like all investments, structured notes come with benefits and drawbacks. Understanding both is vital to decide whether they align with your goals and risk tolerance. Here are the key structured note risks and advantages to be aware of.

Pros

Customizable returns
Investors can tailor structured notes to suit specific market views, whether bullish, bearish, or neutral, offering flexibility not found in traditional investments.

Potential principal protection
Many structured notes offer partial or full principal protection, limiting downside risk if the underlying asset underperforms, assuming the issuer remains solvent.

Exposure to hard-to-access markets
Structured notes can provide exposure to commodities, currencies, and complex strategies that are difficult or costly to access directly. 

Flexibility in investment design
Issuers can create notes with varying maturities, risk levels, and payout structures, creating highly personalized investment strategies. 

Cons

Low liquidity
Structured notes are generally illiquid, meaning they can be difficult to sell before maturity, requiring investors to lock their capital in for several years.

Complexity
The use of embedded derivatives makes structured notes highly complex — investors must ensure they fully understand the terms and risks before committing. Although investors should always fully understand any investment decision they make before committing. 

Issuer credit risk
As unsecured debt obligations, structured notes rely on the issuer's creditworthiness. If they default, investors could lose their entire investment. 

Lack of FDIC insurance
Unlike traditional savings products and certificates of deposit, structured notes typically don’t carry FDIC protection.

For investors seeking market-linked growth potential with built-in downside protection, fixed indexed annuities can be a more straightforward, consistent option.

Complement structured note investments with annuities from Gainbridge

Annuities can be a valuable addition to your investment portfolio, offering a range of options to suit your financial goals, timeline, and risk tolerance. With no hidden fees or commissions, Gainbridge’s digital platform lets you take control of your financial future with ease. To learn how annuities could fit into your overall investment strategy, explore Gainbridge today. 

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This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional. The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes. Investing involves risk, including loss of principal and past performance does not guarantee future results.