Examples Of How Structured Products Work And Perform

When I first wrote about Understanding Structured Derivative Products As An Investment in 2012, I received some pushback. The media was going on about how structured products helped accelerate the financial crisis partly because investors didn't understand what they were getting themselves into.

It was similar to how some adjustable rate mortgage borrowers didn't understand how their loans worked. Further, readers said I could just create these structured investments myself with options for less money.

But I'm always one to keep an open mind about the various types of investments out there. And structured products so happened to fit my desire for some downside protection and upside participation.

What Is A Structured Product Or Note?

A structured product, also known as a market-linked investment, is a pre-packaged investment strategy based on a single security, a basket of securities, options, indices, commodities, debt issuance or foreign currencies.

In 2012, I had just negotiated a severance package after 11 years at my former employer. I was thrilled to get out of jail with money in my pocket, but I was also nervous that I no longer had a steady paycheck at age 34.

Despite the nerves, I mustered up the courage to invest in the S&P 500 and the Dow Jones Industrial Average with all my severance. I felt like I was playing with the house's money. I almost didn't get a severance after I had inadvertently sent an old client document to my personal e-mail as I was backing up more than a decade's worth of material.

My firm put my severance on hold for a week, then said everything was OK as the client document was old and immaterial.

Invested In Structured Products To Hedge

Given I didn't have a job, I didn't feel 100% comfortable going naked long just in case the market recovery was a head fake. Therefore, I decided to invest in structured investments.

Without structured investments, I wouldn't have felt confident investing at least $150,000 in 2012 and lots more in the stock market since 2013. Instead, I probably would have missed out on some of the equity rally by hoarding cash or buying CDs for security.

It's easy to forget about the uncertainty back then since things have been so good for so long. Let's see how these sometimes frowned upon and often misunderstood investments performed.

Structured Notes Performance Overview

I asked my banker to send me a spreadsheet of all my structured notes since I first started in 2012. For the sake of clarity, I've just highlighted the notes that have matured or are maturing in 2018. It's a good way for me to recognize my cash flow, plan for tax liability, and think about how to reinvest the proceeds.

Structured Notes Performance Overview

Thanks to a bull market, all the notes have provided a positive return net of fees. But because of the hedging element, some have underperformed their underlying indices, while others have outperformed.

Structured Note #1 – Underperformance

The first structured note was tied to the DJIA with a 0.5% annual interest payment. The return was based on the arithmetic average of the twenty-four interim index return percentages.

I liked the note because it provided 100% downside protection on its expiration date. In other words, if the DJIA was down 40% on 6/7/2018 from 5/30/12, I would have received 100% of my principal back. The only way I could lose is if Citibank goes bankrupt, so I went all-in.

If I had invested naked long in the DJIA index, I would have returned about 92% versus only 51.33%. But overall, I'm happy to have returned 51.33%, or 7.2% a year on average because my target return based on my risk tolerance and financial situation has been 4% – 5% since leaving work.

Not having to worry as much about losing money felt great. Further, not having $150,000 to draw from gave me motivation to make money. Money makes me lazy. And all I wanted to do after working for 11 years at one firm was sit on the beach.

Structured Note #2 – In-line Performance

The second note in 2013 was tied to the S&P 500 index. It offered a 30% barrier where so long as the S&P 500 was down less than 30% upon maturity, I would receive a 20% return upon maturity. In other words, if the S&P 500 was down 28% on 7/30/18, I would still earn 20%. Once the S&P 500 is up over 20%, I earn a 1-for-1 return. If the S&P 500 broke the 30% barrier, I would lose on a 1-for-1 basis as well.

My total return of 60.18% since 7/30/2013 at the time of this post mirrors the index's performance. Too bad I only invested $10,000 in the index, but it was my way of increasing exposure to the S&P 500 with some protection. What I had to give up was earning an annual dividend yield of roughly 1.5% – 1.8%.

When the second note was purchased on 7/30/2013, I still wasn't 100% sure whether leaving my job was a good idea. I gave myself a two-year time limit and I only had one year left to prove that I could be comfortable surviving on my own without a steady paycheck.

Structured Note

Structured Note #3 & #4 – Big Outperformers

The third structured note was purchased on 8/13/2014 based on the Euro Stoxx 50 index. The EU region lagged the US back then and I made a bet that they would catch up, and hence outperform.

This note is somewhat trickier, but hopefully, this chart will explain it clearly.

Structured Note 3

This chart shows that upon maturity of the note, if the Euro Stoxx 50 index is flat to down 29.9%, I get 100% of my principal back. If the Euro Stoxx 50 index is up 0.1% to +38% upon maturity, I get a guaranteed 38% return (nice!). Once the index goes above 38%, I get a 1-for-1 return. Only after the index declines by 30% or more do I get 1-for-1 downside.

To get this hedge, I gave up earning annual dividends for four years. I liked this investment because of the downside protection, but mostly because of the guaranteed 38% return if the index was barely up.

My hypothesis for EU stocks outperforming US stocks ended up being wrong. If you take a look at the chart below, you can see that since 8/14/2014, the Euro Stoxx 50 is only up 20% (vs +36% for the S&P 500 during the same time period.

But if you refer to my spreadsheet above, my third structured note is up 37.65%, for a healthy 17.65% outperformance of the Euro Stoxx 50 index so far. The note is essentially pricing in a 38% return upon maturity 8/13/18 because its unlikely the Euro Stoxx 50 will give up all of its gains by then. Remember, even if I'm up only 0.1% for the duration of this note, I get a guaranteed 38% return if Citibank is still standing.

My fourth structured note has the same conditions as my third structured note. It's up only 34.66% because there's still a greater chance the Euro Stoxx 50 could give up all its gains with a month longer expiration date.

Euro Stoxx 50 Index

Takeaways From Investing In Structured Products

Hopefully these four examples give you an idea of how structured products work. I know some of you will still hate them because it’s natural to hate what you do not understand. And of course, compared to an index ETF, the fees are much higher. Therefore, before you buy any structured product, consider the following:

* Understand your risk tolerance and how much you are comfortable losing

* Make an educated guess on where we are in the cycle and where will we be upon the note's maturity

* Decide whether you need investment returns to live your life or to just run up the score

* Understand what you are giving up for downside protection and know the cost of each note

* Run through all the different return scenarios provided in the prospectus and calculate the returns net of fees

* Do you believe in the long-term viability of the institution that is issuing the notes

* Estimate your liquidity needs because these investments are not very liquid

* Calculate your opportunity cost given the risk-free rate is rising

Usually Better to Invest Than Not

Overall, the structured notes I invested in are doing their job of providing me exposure to the equities market while also providing downside protection. Remember, I'm not a big fan of equities, but know that I should have exposure over the long run.

While I was busy building Financial Samurai and optimizing my rental property portfolio, my structured investments provided a 7.2% – 10% annual tailwind, which is better than expected. I love when money quietly makes a return in the background without much worrying.

Delaying gratification is also an important takeaway from this post. I could have easily taken the $150,000 I got as part of my severance and blown $20,000 on an international vacation and $130,000 on a Porsche 911 TurboS. After all, it was basically free money so why not YOLO as a young man?

But I knew I had a self-imposed two-year deadline to build Financial Samurai financially strong enough so I wouldn't have to go back to full-time work. Further, I was thinking about starting a family and wanted my wife to be able to stay at home with me as well. Responsibility.

I'll continue to build a structured investment ladder with principal protection, especially at this late in the cycle. But I'll also be more patient to wait for those notes that offer the best risk/reward scenario. The structured investments worked well in a bull market, so I'm hoping they'll do even better in a bear market.

Related posts:

How To Make Money In A Downturn

Investment Portfolios To Consider In Retirement

How Structured Derivative Notes Work

Invest In Private Growth Companies

Finally, consider diversifying into private growth companies through an open venture capital fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment. 

Check out the Innovation Fund, which invests in the following five sectors:

  • Artificial Intelligence & Machine Learning
  • Modern Data Infrastructure
  • Development Operations (DevOps)
  • Financial Technology (FinTech)
  • Real Estate & Property Technology (PropTech)

Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!

The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. In addition, you can see what the Innovation Fund is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.

Readers, anybody else hedge their investments through structured notes? What type of investments allows you to sleep well at night the most? Do you think we tend to hate and fear what we do not understand?

48 thoughts on “Examples Of How Structured Products Work And Perform”

  1. Typically, instead of taking counterparty risk on the issuer and paying whatever fee they charge (or implicit fee like giving up all dividends) you can roll your own version of these structured products with options. Did you evaluate that for any of these notes to see what the implied fees were?

  2. Chuck Sarahan

    You should develop an article or series of articles on how these products work, how to evaluate them, and where to locate ones already trading. I don’t know much about these products but would like a primer for my aging parents.

    1. Hi Chuck,

      Structured notes typically tend to be quite complex and not all of them are created equally. There are an infinite number of possibilities as they are all customized.

      While I do not know your parents background, do be mindful of whether or not they: a) understand the products (i’m mean really understand to the point where they can sell the idea to you), b) are able to pass the suitability assessments, c) have alot of excess cash to deploy a portion to structured notes.

      Though I’m an advocate of derivatives and know all too well how they can be misused. Personally, I like the structured notes with principal protection features, however, I have to be mindful of credit risk (which is the whole Citibank bet in earlier posts).

  3. Marlan Williams

    Hi, I love reading your blog posts. I am a finance student in university and I was just wanting to get in contact with you to see if it is possible that you could come speak at my school. I am not really sure how to contact you, so if you see that and could contact me, that would be great. Thanks!

  4. Can you give a few more details? For example, on your structured note #2, can you list the scenarios where the note would underperform the index?

    Was “Citibank goes bust and I lose most of my note” indeed the only downside ?

    Also, do you know of a mathematical framework to quantify the benefit of the barrier integral against the downside of Citibank going bust? Perhaps tie it to Citibank’s bond yield for a more analytical comparison? Someone must have worked out a theoretical model to add a quantitative component. And is there a way to quantify how much you might recover if Citibank does go bust?

    Without a theoretical model it’s just like Citibank saying “Trust me, and I’ll outperform the SP500 for you”.

    Though in your note #2 case the barrier benefit is significant. Seems too big to have Citibank bankruptcy as the only downside. Perhaps there are other downsides in the contract fine print, or perhaps I too am underestimating the chances of Citibank going bust or a systemic event that brings it down.

    1. Sure, if the S&P 500 broke the 30% barrier, I would lose on a 1-for-1 basis as well e.g. S&P 500 down 80% at maturity, I would be down 80%.

      Yes, I did the mathematical calculations to come up with various scenarios. Then I decided to put my money at risk and invest. I think most people think through the risks and rewards when making an investment.

      I’m also happy to bet with you that Citibank is still standing five years from now if you wish. But for some reason, I find that very few people put their money where their mouth is.

      1. Adding to Sam’s comments, notes are *usually* (check the prospectus) issued under a MTN (Medium Term Note) program, where the issues are typically ranked equal with Senior Unsecured obligations of the issuer. Thus a comparison would be Senior Unsecured bond issued with the same tenor. However, the yield enhancements eg 10% comes from optionality add to the Senior Unsecured bond, so yields should be higher though they are not guaranteed (hence, the optionality). We watched CDS (Credit Default Swaps) very closely during the GFC to monitor the default risk (and thus loss of any principal protection).

  5. Without the bail out most banks would have gone BK including Citi.
    All insurance products are only backed by the underlying company. I do not trust insurance products as an investment. One can always replicate it themselves without the middle man and the cut they take. But it is easier then doing it yourself. In the end it’s a preference. You want low management involvement in your structured product. You want high leverage on your real estate. As long as you execute and don’t deviate the strategy in between you will likely be fine. But I do wish you would go with more clean equity and less alternative investments. Especially since I would consider your web site revenues a financial alternative investment.
    When it comes to your real estate you are taking realty shares credit risk that is highly concentrated and not the actual individual investment. (It’s only financially replicated as the individual investment). At a minimum a different but similar real estate crowd funding company would diversify this specific risk.
    In simple terms (for your followers), you are over 1/2 million concentrated in 1 company.
    This all comes right back down to risk management of the entire portfolio.

    1. Indeed. Life is one big calculated risk. When I take life insurance or any type of insurance, I’ve got to do due diligence on the insurance company’s financial health. And so do everybody else.

      For RS, they created an operating company for my investments, so they can go bankrupt and it’ll be OK bc I own a portion of each investment.

      Structured notes make up a minority percentage of my portfolio by the way. But I do love their performance so far. Remember, what’s good for you might not be good for me and vice versa.

  6. The biggest potential risk wasn’t even mentioned. These are notes and investors are consequently taking credit risk form the
    Issuing company offering the deal etc. Just ask anyone who bought a Lehman backed structured product a decade ago how it worked out….cents on the dollar. You can eliminate that credit risk and get far more favorable terms just recreating these deals through options. There are a reason brokers get compensated 3% plus for these deals….I am a wealth manager and these puppies routinely get pushed hard.

    1. Thanks for reading, and sorry I didn’t write clearly enough for you to see about the credit risk from the issuing company in my post. Here are the statements I made to help with your reading:

      Under Structured Note #1:

      * The only way I could lose is if Citibank goes bankrupt, so I went all-in.

      Before you buy any structured product, consider the following:

      * Understand your risk tolerance and how much you are comfortable losing

      * Make an educated guess on where we are in the cycle and where will we be upon the note’s maturity

      * Decide whether you need investment returns to live your life or to just run up the score

      * Understand what you are giving up for downside protection and know the cost of each note

      * Run through all the different return scenarios provided in the prospectus

      * Do you believe in the long-term viability of the institution that is issuing the notes

      Do you think it would help your reading and other’s if I bold more of my post? I’m always looking for feedback on how to make my posts more understandable to the average person.

      The returns in the chart are after fees. Based on the prospectus, the fees ranged from 0.2% – 1%.

      How much do you charge in fees as a wealth manager? And what are your thoughts on digital wealth advisors charging a fraction of traditional wealth advisors fees?

      PS, there is also a dialogue in the comments about counter party risk. If you think Citibank is going bankrupt, I’d love to make a fun wager with you too. Thanks!

      Related: https://www.financialsamurai.com/questions-to-ask-think-before-hiring-a-financial-advisor/

      1. You highlighted the risks pretty clearly. I think this guy simply has reading comprehension problems. I wouldn’t worry about it. That would be cool if you answer the question on robo advisors though.

  7. Over the past few years, I have been looking for alternative means of receiving income and started investing in structured notes. The ones I invested in provide an annual return between 7-8%, pay out on a quarterly basis and have an autocall feature if the targeted markets are higher after a year. Since there is no initial out of pocket direct costs to me, I have just reinvested in new notes when they were called.
    Overall, I am happy to have these alternative income streams as I get ready to retire in the next 3-4 years.

  8. I bought a structured note with my kids college fund 5 years ago. It gave me 100 percent downside protection. For the protection I gave up all dividends and my upside was capped at 5 percent annually. It was based on a basket of large telecom companies “ AT@T and Verizon.” I invested 200k and my total return over the 5 years was $1500.

    Looking back it was a very poor investment, however if the market had been down during that time period I would have felt brilliant by simply getting my money back.

    My number one reason for investing in a product like this was downside protection. I achieved that, so in hindsight I did pretty good.

    Thanks, Bill

    1. Thanks for sharing your example. Like everything, an investment return depends on the investment choice.

      I tend to just invest in index is more I tend to just invest in indices or higher beta names for the downside protection. Utilities themselves are defensive, so I’d be more comfortable going naked Long then.

  9. Simple Money Man

    This made me salivate: “even if I’m up only 0.1% for the duration of this note, I get a guaranteed 38% return if Citibank is still standing.”

    I’m assuming you can’t buy these direct from an online broker platform and have to call your broker. How would you assess risk factors in a structured note, or did I miss that part?

  10. If you think Citibank is sure bet, why not just buy their corporate bonds and collect a nice 4% yield for the next 5 years?

  11. I have a small percentage of my investments in structured notes. Overall they have been performing well. I’ve made double digit returns on almost all of those that have come due and broken even on one that was tied to American Airlines. I like them as a way to diversify my portfolio and as a set it and forget it asset type. Great post Sam! Glad your positions have been working out well for you!

  12. Whoa. I’ve never heard of structured notes! These sounds pretty awesome and I’ll definitely be looking more closely at these. As I’ve started to really get further into the investing world, I’ve realized that there are tons of financial products that people are just unaware of. Thank you for this very informative blog post Sam!

      1. Wouldn’t using a structured product to hedge against downside risk actually be more appropriate in a downtrend? Did you read the post at all?

        There seems to be so much misunderstanding, and I’m wondering if it’s just simply because the general financial education of Americans is so low.

        What is your background? Why don’t you explain why making money doing a downturn is bad eg example #2 above.

        1. Counterparty risk.

          Remember the moment in The Big Short when CDS holders realized their counterparties might not be around to pay them off?

          This time around the only true credit default swap that will perform will be GOLD.

          1. You think Citibank is going bankrupt after they boosted their Tier 1 capital ratio after surviving the financial crisis?

            I’d love to bet with you they are still around in 5 years. How about it? A friendly $100?

            1. Why not bet that Citibank stock price will double in a year instead? It’s a bet in the same direction.

              Or if you want to bet on downside risk in a more quantitative way…

              How much would you sell a three year put option for Citibank at $7 ( about one tenth its current price) ?

    1. I was invested in structured notes before the financial crisis, through Morgan Stanley. They were valued at pennies on the dollar for an extended period of time (over a year?). Any financial institution could have gone under at that time.

      Andrew commented about Tier 1 capital ratios. OK. Does anyone really fully understand a bank’s leveraged financials or their risk assets? They are all still highly leveraged. It’s unlikely that Citibank will go under in 5 years, but nobody thought the financial crisis would unfold like it did.

      1. Joe, I’d love to do a side bet with you on whether Citibank is around and five years as well. I believe they will be around. You’ve got lots of money to spare. It’ll be fun!

        1. That would be a bad bet on my part, unless you match the odds of them going bankrupt… ;-)

          I’m just saying the odds are not zero. I mistakenly thought there were zero before the financial crisis, which lay bare just how misbehaved banks really are.

          The thing is, you’re buying these structured notes to protect against downside risk. Yet during the downside of the financial crisis, that protection was nowhere to be seen.

          1. You were a fool if you think there was no counterparty risk. Glad you didn’t learn your lesson too badly.

            It’s pretty clear in the article that Sam highlights counterparty risk.

  13. Sam,

    Great insight on this post, risk tolerance is something that gets people in trouble and also prevents people from achieving the returns they desire. I have been reading at least a dozen of your posts a day for a few weeks now (they are addicting) and I am feeling very motivated, so thank you for that. I am a 21 year old college student that graduates in December of 2018. I have a job lined up that I will be starting at $50,000 per year at right away. I am also getting married in September and my fiance plans to make around $30,000 per year to start. We have zero debt of any kind and both have used cars that function. I currently have $20,000 in savings and $5,000 in retirement. My question for the Samurai community is what are my best money moves going forward? Should I be maxing out my 401k right away after college to ensure my retirement is a breeze or should I take the $20,000 and contribute the minimums to retirement and save to have a healthy down payment on a house? If I started maxing out my 401k at 21, the amount that it can grow to is outrageous. However, I do not want to also suffer quality of life and not be able to have a decent home for me and my future wife. Keep up the great writing, Sam.

    1. MRFIREBY2023

      My opinion; keep your savings of $20k intact, place it in a high yield online savings account, most now yield around 2%. Consider this an emergency fund. I do recommend maxing out your 401k and start this as soon as possible. One day you’ll be 50 years old, you’ll check your 401k balance online and never have a regret maxing it out when you were younger. You might have to make financial sacrifices now but they’ll be worth it when you are middle-aged and sitting on $1 million in retirement savings. Don’t be in a hurry to purchase a home. You never know where exactly you’ll be residing and with job changes, offers, transfers, etc. you won’t be tied down.
      Once you make your final destination with job, etc. then look for a home. Good luck to you.
      Mr Fire by 2023

    2. I agree with the above answer.
      The 20k is the perfect amount for that income for an emergency fund. Get the best yield in a liquid form you can find and don’t touch it unless you have high interest debt.
      When you start working max out your retirement plan ASAP so that you never miss the money coming out of your paycheck….you’ll never even know it’s gone and can base your lifestyle on what’s left.
      – rent. You should give it some time to make sure the job, and your wife’s job, and the area are what you want. Don’t be in a hurry to buy until you know you want to stay in a place at least 5 years.

      Now…the big question: what are you doing getting married at 21? I don’t know you and it may be a match made in heaven but THAT is the largest financial decision you are making and it matters far more than the 20k or the 401k. Get it right and if you’re not sure about it then damn the pressure and the awkwardness and put the brakes on that ASAP. That’s just general advice, I hope it works out.

      Drive those used cars into the freaking ground. Take pride in how old your car is and how many miles you can get it too.

      1. Dynx & MrFireby

        Thank you for the advice. Trust me we are not taking this marriage thing lightly. She and I are on the same page and I am sure we will be more successful financially because of our marriage. We are both plugged into good pre-marital counseling and very sure of our decision. I think you are both right about buying a house. I intend on staying where I am at, but you never know the sort of offers that could come up elsewhere. When it comes to buying a house, is the best way to go just pile up the highest down payment and pay it off as soon as possible? Or leverage the cash flow to plug elsewhere for the future? I am a frugal man at heart, I am just not sure if that’s enough to achieve financial freedom. Any thoughts are helpful.


        1. In regards to the house I think for most people the best way is 20% down and a 20 year mortgage.
          It keeps you from stretching for a House you can’t afford.
          In terms of paying it down, it depends. For most people makes sense to pay the mortgage at the normal rate or maybe an extra payment or two a year to shorten the term a bit.
          The math favors investment returns over a long period so paying off “as soon as possible” is generally not beneficial.
          Psychologically there may be a benefit to paying it off ASAP depending on the type of person you are. That’s the kind of person I am so I just paid it off. But that depends on your level of job and financial security. The danger is that you put everything extra you have into the mortgage get 60% there then have some hard times like losing your job. Now all that money is tied up, you have lost your job so may not be able to refinance and the banks not gonna Care if you paid extra before…they’re gonna want their money next month.
          If you go the “payoff ASAP” route i’d recommend investing the extra money then, when it becomes enough to pay the balance off in full, decide if you want to make the lump sum payment at that time.

  14. MrFireby2023

    I’ve really enjoyed your last few articles concerning investing and this article is no exception. I have a limited experience with structured products. My mother’s brokerage accounts (which I manage) are at Merrill Lynch and on occasion they’ve offered attractive structured products, but not often enough. About two years ago they offered a product similar to yours mentioned, though it was based on the Russell 2000. It became profitable almost immediately as our timing for purchasing was just before a nice, extended rally in the index. What surprised me (and you better check this out on your products) is that after only 4 brief months, Merrill redeemed the note (much like a preferred stock getting called early). She received a few thousand dollars in capital appreciation but it’s disappointing how this could have kept growing during the 2 year term had they not redeemed it. If anything I feel like the issuer was flakey!
    In my own personal account which is housed at Schwab, I doubt this broker offers such products. In lieu of that I choose to sell puts. For instance, yesterday I sold 2 contracts of the SPY June 2019 (275 strike) put options and collected $1500. Per contract ($3000. Total). As long as the SPY is above 275 in one year I’ll keep all of the premium. My downside hedged protection is 15 points. In other words, the SPY would need to be trading below 260 one year from now before I lose a dime. This is my own “synthetic” structured product.

    1. Ah, riding the Russell 2000 until now would have been a great investment!

      Yes, there are “autocalls” in some structured products and investor needs to be aware of as well. For example, if the underlying index is above the initial level after 4 quarters, the note will be called. I’m sure it’s in the prospectus.

      What happens is that investors don’t fully read the prospectus, read the various scenarios provided in the prospectus, or understand the different scenarios, and then get angry. Then structured products get a bad wrap.

      Hopefully this post well help educate folks better before buying a structured product, or any investment. But I’m sure there will continue to be disdain for that which we do not understand.

      1. This is exactly the issue I have with the structured notes I reviewed. All could be “called” when significant upside was encountered and had an initial fee. Essentially I’d put up 4-5% and if they go gang busters they call them after a year and I’m stuck with less than market returns after you take out the fee.
        I’d be curious if the notes mentioned above were redeemable by the issuer.

        1. Not these ones. But I have invested some that had an autocall feature quarterly.

          For example, there was one that I just passed on that was an Amazon structured product. It had a 10% dividend, paid quarterly. But if the stock was above the initial level after quarter it would be called.

          So you were betting on the stock being flattered down 27% during that year to get the full 10%. Or you can just bet big money, and receive a 2.5% return in just three months if the stock doesn’t go down more than 27%.

          1. That sounds interesting for sure. Maybe I shouldn’t have given the financial advisor the cold shoulder.
            Do you have a financial guy that just sends you what’s available that he recommends or do you track these down yourself? I’d probably drive my wife nuts reading through stacks of these things if I had someone to send me selections. Maybe better I stick to stocks and real estate.

          2. Hi Sam,

            Great post. I’ve always believed that derivatives can be used for good (and not always evil). Just to check, these Amazon notes were with principal protection? What was the maturity (eg 1year)? I’m asking as I’m setting up the structured products desk for a bank, so I’m exploring various payoffs.

    2. I know what you mean! I felt the same exact way when Citi called a note on me last year. Oh well, atleast I got paid 2 quarters of dividend.

    3. Interesting strategy. Doesn’t that increase your risk in the event of a significant downturn in the market?

  15. Hi Sam,

    These are very interesting products! What are your thoughts on investing in leveraged ETFs once we hit market bottom? There’s been a lot of negative press around the dangers of leveraged ETFs but wanted to get your thoughts on putting money in these products once we hit market bottom (for example in March 2009).

    1. Curious,

      Leveraged ETFs should be short term trades and not buy and hold investments. Please read up on those. Furthermore, did you know it was market bottom in March of 09? It’s easy to see on a chart now but many thought the bottom was well before that time or even after. Timing the market is extremely difficult.


      1. Agree with Josh, be careful to read up on the fine print with leveraged ETFs. some ETF calculation methodologies mean you can lose more than you expected while making less than expected. this occurred previously, especially with leveraged short ETFs

  16. Very interesting, never really contemplated structured notes as part of my portfolio. The closer to FI you are the better these probably are to still get stock market exposure I guess? Will have to look into this. Thnaks for the detailed write up and easily understandable explanation.

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