Making innovative investments – structured products open up new options
Low interest rates and high equity valuations are causing investors to look for suitable alternatives. Structured products combine derivatives with traditional investment products, thus offering variable investment opportunities so you can leverage attractive potential yields in any market environment. This article reveals what you need to know about the topic.
Structured products are a versatile investment
Thanks to their enormous flexibility, structured products serve as an exciting addition to an investor's portfolio and are increasingly taking hold as investment instruments in Switzerland. Sales of structured products in Switzerland have steadily risen following the sharp decline caused by the financial crisis, reaching a value of 352 billion Swiss francs in 2019. This trend is continuing even during the COVID-19 pandemic. That is because the extreme market volatility, combined with low valuations, created an exciting environment for structured products.
Contrary to widespread belief, structured products are not only suitable for investors who are willing to take on high risk, but also for cautious investors looking at the wide range of products for suitable alternatives. The spectrum ranges from conservative investments with low risk of loss to strategies with very high risk that promise high returns in the event of success.
Investing in structured products
The use of structured products can significantly boost the risk/reward ratio in a portfolio. Investors have a wide variety of options to choose from. On the one hand, the market has countless derivatives on offer. On the other, investors can design structured products themselves and adapt them perfectly to meet their needs and desires, be it in terms of risk profile or their own expectations for the financial markets.
Derivative financial products open up vast opportunities
Even with sideways-moving markets or falling market prices, investors can achieve profits with structured products, depending on the scenario they set. Because the choice of underlying asset opens up myriad options, it even enables investment in markets that are otherwise difficult to access. There is hardly another product class that is more suitable for portfolio diversification.
Many investors rely on structured derivatives to earn income in the form of a fixed coupon, even when markets are difficult. Incorporating a risk buffer can also provide some extra protection.
Conversely, the payout profile can be designed so that investors with greater risk tolerance are able to benefit disproportionately from growth in the underlying asset. Structured derivatives can also often be purchased for little money, enabling people on a tight budget to diversify their investments.
Preconceived notions of structured products persist
Despite the advantages described above, structured products are still subject to some preconceptions: too expensive, too obscure, too little return. The costs associated with them are generally comparable with investing in traditional investment funds. The investment formula is what determines success or failure. Investors are therefore not at the mercy of the fund manager's decisions.
Moreover, issuers of structured products in Switzerland make a commitment to disclose all expenses and risks to investors in a transparent manner and simple language in the key information documents (KID). This makes it easier – especially for private investors – to understand all the important information about the products and to compare them.
Do not ignore the risks of structured products
That being said, there is no return without risk. As with all securities, there are also risks when investing in derivative financial investments. The worst-case scenario involves the investor losing his or her entire capital. That can happen whenever the expected trend in growth of the underlying asset does not materialize or the issuer of the structured product ends up having to file for bankruptcy. Investors can protect themselves from this risk only to a limited extent by carefully examining issuers' credit ratings or buying products only from trustworthy financial institutions. Furthermore, capital protection certificates allow investors to hedge their invested capital against market risks. When used properly, structured financial products offer every investor (or every risk profile) suitable solutions for realizing their individual market expectations efficiently.