An Introduction to Structured Products

Fact checked by Vikki Velasquez
Reviewed by Charles Potters

The evolution of structured products has been a crucial part of the ongoing dramatic transformation of investing, bringing sophisticated investments once reserved for institutions and the ultra-wealthy to a broader audience.

Structured products offer customized exposure to derivatives and alternative investment strategies. Below, we introduce you to their features, why they’re used, and major developments in the last decade that have reshaped this investment category.

Key Takeaways

• Structured products are prepackaged investments that normally include assets linked to interest, plus one or more derivatives.
• These products may take traditional securities, such as an investment-grade bond, and replace the usual payment features with nontraditional payoffs.
• The risks of structured products include their complexity and often a lack of pricing transparency and liquidity.
• Providers of exchange-traded funds (ETFs) have been introducing their own versions of structured products, such as buffered and covered call ETFs.

What Are Structured Products?

Structured products are prepackaged investments that typically combine assets linked to interest rates with one or more derivatives. Here are some examples:

• A principal-protected note that guarantees the return of your initial investment while providing partial exposure to stock market gains.
• A yield enhancement product that offers above-market interest rates in exchange for capping your potential returns.
• A buffered note that protects against initial losses (e.g., the first 10%-15%) but exposes investors to losses beyond that buffer.
• An auto-callable product that can end early with a preset return if the underlying asset reaches a certain price.

These products are tied to indexes or securities and are designed to meet specific risk-return profiles. This is done by taking a traditional security, such as a conventional bond, and replacing the usual payment features—periodic coupons and final principal—with nontraditional payoffs derived from the performance of one or more underlying assets rather than the issuer’s own cash flow.

Evolution in the Structured Product Market

A main driver behind the original creation of structured products was the need for companies to issue cheap debt. They originated in Europe and later gained traction in the U.S., where they are often offered as U.S. Securities and Exchange Commission (SEC)-registered products, making them accessible to retail investors in the same way as stocks, bonds, ETFs, and mutual funds.

The market continues to shift. ETFs now provide similar payoff profiles, but with better liquidity and more transparent pricing. Buffered ETFs, which offer downside protection, and covered call ETFs, which generate income by selling upside potential, have amassed about $1.2 billion in assets in the U.S.

Returns

Issuers normally pay returns on structured products once they reach maturity. Payoffs or returns from these performance outcomes are contingent in the sense that, if the underlying assets return a preset amount, then the structured product pays out a preset range.

Structured products offer engineered payoff profiles designed for specific market views that would otherwise require complex derivatives trades that many investors either don’t have the time or the expertise to pull off.

What’s Under the Hood?

It’s easier to understand these products by looking at an example. Let’s say a well-known bank issues structured products such as notes, each with a notional face value of $1,000 and a maturity of three years. Each note consists of two components:

1. A zero-coupon bond.
2. A call option on an underlying equity instrument, such as a stock or an ETF that mimics a popular index like the S&P 500.

Although the pricing for these instruments is complicated, the underlying idea isn’t. The example in the figure above shows a structured product where, on the issue date, you would pay the face amount of $1,000. The note is fully principal-protected, meaning you’ll get your $1,000 back at maturity no matter what happens to the underlying asset (whether it goes up or down in value), provided the issuer remains solvent. This is done via the zero-coupon bond.

To provide further gains, the underlying asset is priced as a European call option. If applicable, you earn that return. If not, the option expires worthless, and you will get nothing beyond the return of your initial $1,000 principal.

Why use these complicated products when you might get these results in an overall portfolio? While traditional diversification spreads risk across different assets, structured products can offer specific outcomes that even perfectly balanced portfolios can’t— such as complete downside protection in a market crash—while still capturing any upside.

Custom Sizing

Let’s look at another example where an investor is willing to risk their principal to potentially earn higher returns. Suppose, in this case, the bank offers a structured note that works like this:

• If the underlying asset, e.g., stock market index, goes up by any amount up to 7.5%, you get double the return. So, if stocks rise 3%, you earn 6%, if stocks rise 7.5%, you earn 15%, etc.
• If the market index rises more than 7.5%, your return is capped at 15%.
• If the index falls, you lose money at the same rate (there’s no protection). So if stocks drop 10%, you lose 10%.

This type of product would appeal to an investor who expects modest market gains in the medium term and wants to amplify those returns while being willing to accept losses if the market declines. Unlike the previous example, this note offers no principal protection.

The Rainbow Note

Rainbow notes offer exposure to multiple underlying assets in one instrument. For example, a single rainbow note might derive performance from three diversified assets like the Russell 3000 Index, the MSCI Pacific Ex-Japan Index (covering Asian markets outside of Japan), and a commodity index.

These notes often have lookback features, calculating returns based on the average value of the underlying assets over the note’s term rather than just the final value at expiration. For instance, a quarterly lookback would average the index values after each quarter rather than using only the value at maturity. Option traders call this an “Asian option,” distinguishing it from standard European or American options. This averaging mechanism often cuts down on the impact of short-term volatility, delivering more stable returns.

Note

The value of the underlying asset for a lookback feature is based on an average of values taken over the note’s term.

What Are the Risks of Structured Products?

Although cash flows are derived from other sources, structured products are considered part of the issuing financial institution’s liabilities. If the issuer has financial difficulties, investors may lose their entire principal, even with “principal protected” products. In addition, only certain market-linked certificates of deposit come with Federal Deposit Insurance Corporation insurance protection (up to a limit of $250,000 per account owner, per institution).

That said, most structured products come from high-investment-grade issuers like Barclays PLC (BCS), Deutsche Bank (DB), and JPMorgan Chase & Co. (JPM).

Here are some other common drawbacks with these investments:

They’re Hard to Sell

A significant risk with structured products is that they are highly customized and are less liquid than derivatives and bonds on their own. For this reason, structured products tend to be more of a buy-and-hold investment.

If you have to sell a structured product before maturity, you’ll typically sell it back to the issuing institution. Even with full principal protection, you might take a major hit on the face value.

ETFs vs. ETNs

ETNs differ from ETFs in that they hold debt instruments and cash flows related to their performance.

Complexity and Obscure Pricing

The intricacy of many structured products can make it difficult for even sophisticated investors to understand all the risk-return trade-offs. Features like barriers, buffers, participation rates, and lookback provisions can interact in ways that aren’t intuitive.

In addition, there’s no uniform pricing standard for them, making it harder to compare net results in the same way you can quickly check ETF expense ratios. Many structured product issuers work the pricing into their option models to avoid an explicit fee or other expense to the investor. On the flip side, this means the investor can’t know for sure the true value of implicit costs.

Before issuance, structured notes typically include an initial estimated value on the cover page of the prospectus or pricing supplement. This estimated value is generally less than the price of the note, with the difference representing costs and the issuer’s profit margin. This embedded cost can be substantial but is rarely clear to investors.

The ETF Revolution in Structured Products

A significant change in this area of finance occurred in 2006 with the introduction of exchange-traded notes (ETNs) that mimic structured products. These and the ETFs introduced later are traded like a common stock on a securities exchange, thus addressing their major drawback: a lack of liquidity.

Buffered ETFs

Buffered ETFs had grown to about $43.4 billion in assets in the U.S. as of May 2025, with an average expense ratio of 0.77%, according to our analysis of data from the ETF Database. They use options strategies to provide downside protection in exchange for capped upside potential.

Buffer ETFs often include months in their names to indicate the start and end dates of their outcome period. To get the full benefit of the buffer protection and potential capped returns, investors need to buy the ETF at the beginning of the outcome period and hold until the end.

Covered Call ETFs

Also known as “buy-write” ETFs, these funds have about $75.2B in assets under management, with an average expense ratio of 0.80%. They generate income by selling call options against their underlying holdings. This strategy sacrifices some upside potential in exchange for immediate income, similar to yield-improving structured products.

These ETFs are more popular when interest rates are low and investors want alternative income sources.

ETFs versus Traditional Structured Products

ETFs

• Ease of trading on exchanges

• Visible pricing with intraday trading

• Lower minimum investment amounts

• Often avoids single-issuer credit risk

Structured Products

• Can offer more customizable payoff profiles

• Potential for principal protection through issuer guarantees

• More complex multi-asset strategies like rainbow notes

• Wider variety of underlying asset classes

Tax Implications of Structured Products

Structured products may be considered contingent payment debt instruments for federal income tax purposes. This means you’ll usually have to pay income taxes each year on imputed annual income, even if you’re not getting a cash payment until maturity.

In addition, any gain realized when selling these products may be treated as ordinary income rather than the generally more favorable capital gains rates. This contrasts significantly with ETFs: most buffer and covered call ETFs are structured to allow capital gains to be treated as long-term for tax purposes.

ETNs, however, have more in common with structured notes since they involve debt instruments. While some ETNs may qualify for long-term capital gains treatment if held for more than a year, others might not be. The exact tax implications vary by product, making consultation with a tax professional particularly important when comparing structured products and their ETF and ETN counterparts.

Are Claims Right That Structured Products Can Negatively Affect Market Volatility?

Research from the Bank for International Settlements suggests structured products may dampen market volatility. When dealers hedge with these products, they typically buy when markets fall and sell when markets rise—acting as contrarian traders that smooth price movements.

This dynamic could explain why volatility indexes like the VIX sometimes remain surprisingly low during market uncertainty.

How Are Wealth Management Firms Changing Their Approach to Structured Products?

Wealth management firms are increasingly creating branded structured product offerings through partnerships with ETF providers. This allows them to offer clients structured product-like exposures while addressing transparency and liquidity concerns.

Are Structured Products Moving Into Previously Inaccessible Asset Classes?

Yes. For example, there are now proposals to launch ETFs that would invest in both public and private credit markets—traditionally separated because of liquidity concerns. These hybrid vehicles function like structured products by engineering specific risk-return profiles, but through an ETF wrapper. 

While regulators are still evaluating these proposals, they would represent a significant incursion of these once inaccessible asset classes into the public markets.

The Bottom Line

Structured products and their ETF alternatives offer sophisticated strategies for investors who want specific risk-return profiles. While traditional structured products provide principal protection and tailored outcomes, ETF alternatives come with better liquidity and more transparency.

As with any complex financial instrument, investors should thoroughly understand their specific terms, risks, and costs before investing.