Today I'm going to talk about structured products. What are they, some of the misconceptions, and how you might want to use them. This is your first time ever channel or you haven't subscribed. Click the subscribe button at the bottom. My name is Travis Sickle, CERTIFIED FINANCIAL PLANNER with Sickle Hunter Financial Advisors.
There's a lot of information out there on structured products.
A lot of it is a little misleading. So I'm hoping to educate you a little bit on what they are and how to use them so you can use them for your financial life or how to use them for your financial life. Structured products are very broad because you have structured notes and you have structured CDs. So before we get into structured notes, I kind of want you to think of structured products the same way that you think of stocks.
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And why is that? There's a lot of different kinds of stocks. You have large cap stocks, mid-cap stocks. You have aggressive stocks, conservative stocks, blue chip stocks, micro-cap stocks, stocks that pay dividends, stocks that have more growth potential in all these different kind of stocks. And if you have two investors that are going out investing in the stock market, they can have very different risk profiles.
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But there are just as many different stocks out there to choose from. A structured product is a lot like stocks. There is just a ton of different kinds. And each one is unique. A structure note is a product that is linked to an underlying asset like a stock or an index like the S&P 500 or the Russell 2000.
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So let's talk about those. Let's talk about three of those words derivative product and linked. So the derivative is based on something else So rather than investing directly into the stock market, a structured product can be based on the stock market. When we're talking about a product, it's a package it's something that's put together by somebody else. So a lot of the large banks put together the structured notes or the structured CDs or the structured products in general.
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And that is called a product. And the linked portion is similar to the derivative where it's linked to something. So it's based on something else. So the link is to what index it's going to be linked to. Some of our structured products are FDIC insured like these structured CDs. So they have guarantees and you can't lose principle and they are backed by the FDIC insurance.
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On the other side, there are principle protected structured products where you might lose some money depending on the performance. Just like investing in the stock market, you might make money or you might lose money depending on the performance So similar to stocks, there's also income and growth. So the income are going to be the dividend type of stocks.
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Think more CDs in this term. So the income portion to it's going to be that interest payment and it's going to be a 1099 interest payment to you that you'll get an either monthly or a quarter or however the structured notice set up. And on the other side, there are structure notes that are just growth oriented. So if the underlying index does a certain percentage, you might get what's called a participation.
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So it's basically a percentage of those gains. So if it's 120% of those gains and the S&P 500 for instance, did 10%, let's say the S&P 500 to 10%, you're at 120% participation. That means you'll make 12%. The other piece of the structure note that's really misrepresented is the fee structure. Now there are commission fee structures and there are fee only commission structures.
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So it really depends on how you're going about investing into the structure. No, especially when you're matching that risk reward profile up to what you're trying to achieve. So one more time on the fees. The fees can be low inside of them relative to other investments, including mutual funds and ETFs. If you look at the fees relative they're competitive with both mutual funds and ETFs.
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So to think that they're really expensive, that is just a big misconception. It depends on which structure note that you choose. So go ahead and look at the fees and make sure that you're making those comparisons. You know what investment you're getting into. But don't think that every structure note is really expensive. And don't think every structure note is really complicated.
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Some of them are structured very simplistically, so you can understand them pretty quickly. And see what they're based on. The scary portion to it is there are a derivative product, which just means that you don't own the asset or the asset that underlying the structure. No directly. Another misrepresentation of structured notes that I've often seen is the duration, and that's the time frame.
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How long do you have to invest inside of a structured note? And that varies. Some of them are as short as 12 months, 18 months, 24 months, three, four and five years. So there's a wide variety of structured timeframes that you can invest into them, and you really want to look at matching that timeframe up with your goal.
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There's a lot of different reasons investors buy structured notes or structured CDs or structured products, and they all fit a different objective. So for example, if you have a short term goal, let's say it's two, three or four years out, you might not want to consider investing directly into the stock market because that's going to be volatile. But at the same time, you might not just want to stick your money in a bank getting a half or 1%, depending on what rate you're going to get or looking at the other conservative alternative just regular CDs.
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Even if those are at one, two and 3%, maybe you could do a little bit better. But you don't want to risk the principle of investing in the stock market. So there might be a structured seed. And if you're looking for a little bit longer term goal, three, four or five years, you might want to consider a structured note, which might have a little bit more growth potential over the long haul with some protections.
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So it really depends on what you're trying to achieve. What's the best product or the best investment for that particular goal? On the other side, you might consider to be too conservative of an investment. If your timeframe is ten plus years, that's when you might want to consider investing in the stock market. So it really depends on what you're trying to do and what those trade offs are.
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So some of the other negatives that I've heard out there is if you can invest into the S&P 500 over the long haul, it will do about 10%. If you look at this historical numbers, that's what it's done in the past. Of course, that's no indicator of the future. But if you're looking and comparing it to that, you can expect that a structure note probably won't do as well as the S&P 500.
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It might do a little bit less than the S&P 500 especially if it's linked to it. So that is another thing to consider. While it's a more conservative investment, you might not get the same return as, say, the S&P 500. But on the flip side, you might get a better return then. Like I mentioned before, either a low interest rate savings account or a CD or something that's really, really on the conservative side.
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Of course, with any investment, you want to make sure you understand it, that you're comfortable with it, and then it works for your particular situation. So take the time to learn a little bit more about what a structure, note or structured CD could do in your particular situation. And again, it's not right for everybody, but it is right in some cases.
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So you want to take a little bit closer look and see if it makes sense. If you enjoyed this video, be sure to subscribe and leave your comments down at the bottom