Invest Smart: Structured Notes vs. ETFs Compared (2024)

• Retirement

• Structure: They are hybrid securities, combining a traditional bond component with a derivative component.
• Bond component: This makes up a larger portion of the investment, almost 80% of the investment size. It offers principal protection, similar to a regular bond.
• Derivative component: This component, which is around 20% provides the potential for additional returns based on the performance of the underlying asset class. These assets are usually riskier, with high return potential.
• Underlying assets: Structured notes can be linked to various assets, including stocks, indexes, commodities, interest rates, and currencies.

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• Investor purchases a structured note: You invest a certain amount of money in the note, just like buying a bond.
• Performance of the underlying asset: If the underlying asset performs well, the derivative component generates a return, it then boosts your overall gain which is beyond the principal invested.
• Maturity: When the note reaches its maturity date, what you receive is
• Original investment: Guaranteed even if the underlying asset loses value. The bond component eventually grows to the size of the original investment.
• Potential additional return: Based on the performance of the derivative component. This component usually generates high returns.

• Principal protection: Certain notes offer protection against losses in the underlying asset, up to a predefined level. The bond component also ensures that the principal is protected.
• Income generation: Some notes offer regular coupon payments, providing a potential income stream.
• Limited upside potential: Compared to directly owning the underlying asset, structured notes may cap potential gains.
• Complexity: The structure and terms of each note can be complex, requiring careful evaluation before investing.
• Issuer credit risk: Investors rely on the issuing institution’s creditworthiness to receive promised returns.

Also Read: When and Why Should You Consider Investing in Structured Notes?

Here’s a breakdown of how an ETF works:

• Creation: An authorized participant (like a large financial institution, or fund houses) buys a basket of underlying securities (e.g., stocks) that match the ETF’s target index.
• Shares are created: These underlying securities are then bundled into “creation units” and exchanged with the ETF provider for shares of the ETF.
• Trading: The ETF provider then lists the ETF on a stock exchange, allowing investors to buy and sell shares throughout the trading day, just like individual stocks.
• Tracking the index: The ETF manager continuously monitors and adjusts the holdings within the ETF to ensure it closely mirrors the performance of the target index.

• Diversification: ETFs hold a basket of assets, spreading risk and reducing exposure to individual companies or sectors.
• Transparency: Holdings and performance are readily available, allowing for informed investment decisions.
• Liquidity: ETFs trade throughout the day, offering easy entry and exit from positions.
• Market risk: Exchange traded fund performance is directly tied to the underlying assets, exposing investors to market fluctuations.
• No income guarantees: While some ETFs provide distribute dividends, they are not guaranteed.

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The choice between structured notes and ETFs depends on your financial goals linked to the investment, risk tolerance, and investment experience. Here’s a brief comparison between ETFs vs structured notes to help you arrive at a decision

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