Structured notes to surpass CDs this year, finds survey

Structured notes are likely to surpass certificates of deposit (CDs) this year, according to a December 2012 survey by US structured products distributor Incapital.

Specifically, non-principal-protected notes have the greatest growth potential among investors of all structured products, according to the majority of respondents.

Incapital says it has noticed a shift in investors’ appetite that is likely to continue into 2013, as more and more financial professionals gravitate towards non-protected or partially protected notes, according to the distributor.

While to some this may signal an increase in investor risk appetite – a move away from CDs, which are government insured, and into notes that put investors’ capital at risk – many industry participants say the shift is due primarily to the low interest-rate environment, which makes it nearly impossible to structure products that are capital protected.

“The appetite for risk this year versus last year is about the same,” says Mike Clark, New York-based managing director and head of retail distribution at Credit Suisse. “However, the terms on CDs have become so uneconomical that they are not as much of a viable alternative.”

If we were in a higher-rate environment, we would not be discussing the switch out of CDs to non-government guaranteed products, says Clark.

As a result, investors are looking for higher returns and those higher returns are not easily available within the Federal Deposit Insurance Corporation insured market (market-linked CDs), says Serge Troyanovsky, head of North America retail distribution at BNP Paribas in New York. Therefore, investors are cautiously beginning to look at the structured notes (both principal-protected and non-principal-protected) to get a pick-up in yield, he says.

The survey, for which nearly 100 financial professionals were interviewed, also revealed that 60% of respondents view education as the main component in making structured products more popular. In addition, the survey found that the greatest attribute of structured products is enhanced yield, with 42% of respondents finding them most valuable for that purpose.


This article was first published on Risk

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