22 September 2009

Structured Products and Artificial Christmas Trees

Our children used to enjoy the annual trip to buy a Christmas tree. But realistically, artificial ones do have some advantages even though they don’t smell like the real thing.

Structured Products are a class of investment products with the same feel to them as artificial Christmas trees. They are offered by a range of providers, and the key thing about them is that the return you get (whether as income or capital growth) is in some way dependent on the performance of an index, such as the FTSE 100. They will also have a fixed term before maturity.

As such, you are not generally investing directly in the underlying assets (and you may not know what that is - although it’s worth finding out), and you are dependent on the good services of the product provider (and anyone else they partner with) to provide the security of your money. That’s why it doesn’t smell like the real thing.

Having said that, they do provide some insulation from exposure to the stockmarket, and so are a suitable next step up from deposits in some circumstances.

Just to give you a flavour, Structured Products include:
  • Income products, which continue paying a pre-defined income unless the FTSE 100 falls below a certain level
  • Growth products, which promise a certain return unless an index falls below a certain level
  • “Kick out” plans where the product matures and gives you a pre-determined return at the end of year 1, or year 2, or … if an index has grown sufficiently.
There are a different set of risks in investing in these products – arguably less than investing in equity-based unit trusts, for example. So it pays to do your research, particularly to know who gets their hands on your money – the “counterparty”.

If an artificial Christmas tree does the job, and doesn’t drop any needles, it may be worth a look – just like Structured Products.

Here’s one place you could take a look: Structured Products list
Update August 2010: This page no longer includes Structured Products.

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