One way to simplify this selection process and to circumvent any potential problems is to opt for shorter-term issues. The first and most basic reason to do so is because volatility can rise sharply at any point, causing a great degree of market uncertainty, which makes it increasingly difficult to look five or more years ahead.
This has led to a trend for more short-termism when predicting market movements, thus making it more practical to invest with up to a three year view in mind – given that structured notes are typically underpinned by a basket of individual stocks they should follow suit to keep in line with this current way of thinking.
Another recommended feature to watch out for within notes are early redemption observation dates which provide the ability for the note to cash out early should the underlying securities be trading above initial strike prices.
Evolving nature of the market
The prime reason to look for such features are opportunity cost and the evolving nature of this market, where new styles are continuously offered by issuing banks, and if used correctly can increase returns and help keep in line with changing market conditions.
To give an example, let’s say one opted for a two year short term issue with frequent observation dates instead of a five year fixed term issue throughout the first half of 2015 when markets were buoyant.
The chances are that they would have already automatically cashed out early over that period and be given the opportunity to re-issue, where over the second half of 2015 they could have constructed a new note to profit from a falling market – an example of a relatively new feature that banks do now offer in this market – and ultimately meaning that they’d currently be sitting on a flexible gain position as compared to a loss which wouldn’t be due to settle for another few years.
The other important point to note is that returns are typically consistent when choosing between different terms, i.e. a six year fixed issue may provide 8% per annum year on year although a three year note with early observations will also give you the same 8%.