A Guide to Structured Products

Overview

Introduction

We’ve created this guide to offer a straightforward introduction to structured products. It is designed for investors seeking capital protection, income, or growth, and includes clearly explained product types along with illustrative case studies. While the examples are representative, they are for illustration only and should not be taken as financial advice. For a full comprehensive guide please click download.

Why IDAD?

Founded in 2002, IDAD has established itself as a leading provider of structured investments globally. The UK team combines over 100 years of experience in the structured product space, specialising in tailored solutions for wealth managers and IFAs. IDAD stands out through its commitment to innovation, strong governance, and digital tools for real-time tracking and transparency.

What is a Structured Product?

A structured product is a pre-defined investment combining various financial instruments into a single strategy, typically linked to the performance of an underlying asset or index. These products can be designed to suit different market views – whether focused on growth, income, or protection. Most structured products are issued for fixed terms and may include early maturity features depending on the structure.

Types of Structured Products

• Kick Out (Autocall): Can mature early if performance conditions are met.
• Income: Designed to deliver regular payments, often with conditional criteria.
• Fixed Term: Pays a fixed return at maturity based on market conditions.
• Growth / Participation: Offers return linked to market upside, often enhanced by participation multipliers.

Capital Protection Structures

• Capital Protected Products: Provide full return of original capital regardless of market performance, subject to counterparty risk.
• Structured Capital At Risk Products (SCARPs): Offer higher return potential but expose capital to loss if markets perform poorly.
• Structured Deposits: Capital-protected and eligible for FSCS protection up to £85,000, but returns are typically lower.

A table compares these formats across capital protection, return potential, and investor suitability.

Protection Barriers

Two key forms of capital protection barriers are used:

• European Barrier: Only measured at maturity. If breached, capital loss reflects the fall in the underlying.
• American Barrier: Monitored throughout the investment. A single breach at any point may trigger capital loss.

The guide provides visual examples of different scenarios under both barrier types to illustrate potential outcomes based on market movements.

Kick Out Products

Kick outs (or autocalls) offer early maturity opportunities on preset dates. If the underlying meets performance criteria, the investment pays out and ends.

Variations include:

• Standard Autocall: Requires the underlying to be at or above its start level.
• Step Down: Allows kick out at progressively lower levels.
• Super Step Down: Requires significantly lower market levels for payout, offering more defensive structure.

Income Products

These provide income either conditionally (based on market performance) or unconditionally (fixed income). Structures may include:

• Conditional Income: Paid only if the underlying meets certain thresholds.
• Memory Feature: Missed payments may be recouped if the condition is later met.
• Reverse Convertibles: Offer fixed income regardless of market performance.
• Conditional Income Kick Out: Pays income while active, but stops if the product matures early.

Participation Growth Products

These are designed to magnify returns when markets rise. Known as “supertrackers,” they may offer participation rates above 100%, allowing investors to earn a multiple of the market return. Products may include a cap on maximum returns.

Callable Products

Callable structures allow the issuer to redeem the investment early under certain conditions:

• Callable Deposits: Fully capital-protected. If not called, benefit from enhanced participation in growth.
• Callable Plans (Protected): Capital-protected with early redemption option and potential for fixed payouts.
• Callable at Risk: Capital is not protected if the market falls significantly, but offers higher returns if conditions are favourable.

Fixed Term Options

Fixed term or digital products pay a pre-set return if a final condition is met at maturity. If the condition is not met, no return is paid, but variations exist:

• Growth: Fixed return paid only if the underlying meets the maturity condition.
• Growth Accrual: Return builds up through the term based on market observations.

These products do not offer early maturity opportunities.