Structured products are a broad category of financial instruments that can be used by investors to benefit from price movements in certain underlying assets, often only with a relatively small investment. Examples of structured products are turbos, warrants and (factor) certificates and more. With these products, it is possible to achieve a high return, but this is often accompanied by high costs and high risk. Structured products are generally issued by large financial institutions such as Goldman Sachs and BNP Paribas. Through our platform, you have the opportunity to trade in turbos, certificates, warrants and other structured products.
Different structured products can have different characteristics. Whereas warrants are more similar to options, turbos and certificates are not. Structured products can be used to respond to an increase or decrease in an underlying asset. Examples of popular underlying values are individual stocks, indices, commodities or currency pairs. Do you expect an increase in price? Then you can buy a so-called long product. With a short position, on the other hand, you benefit from a price decrease. Many structured products have built-in leverage. The leverage of a structured product indicates the percentage by which the value of the product will move if the underlying moves by 1%. For example, a leverage level of 5 means that if the underlying moves by 1%, the product moves by 5%.
As mentioned, structured products such as turbos and warrants are issued by a third party, which is usually a bank. The bank generates income from these products by charging financing costs in the form of interest among other costs. On top of that, brokers often charge transaction fees for this type of product.
Structured products can have expiration dates. Structured products are usually physically settled, and some are cash-settled on the expiration date. This means that you either receive cash or the underlying asset(s), depending on whether the product still has value when it expires. At expiry, the issuer determines whether there is a remaining value. If there is, this is paid out to the investor.
A product can be taken off the market before the expiration date. A reason for this could be that there is no market (no buyers and sellers) for a specific product. With a turbo, for example, this can also happen if the knock-out level of the product has been reached.
Certain structured products, such as turbos or certificates, have a knock-out level. When the price of the underlying drops below the financing level, which is the amount of the underlying financed by the issuer, the issuer can no longer fully recover the investment. Therefore, these structured products have a built-in stop-loss, which is also referred to as the knock-out level. As soon as this predetermined limit has been reached, the product is automatically terminated. This means that the product is taken off the market and stops trading. The issuer will then determine if there is a remaining value, which will then be paid out to the investor. It can also be that the value is zero at the moment that the knock-out level is reached. With a turbo, for example, this occurs when the knock-out level and the financing level are equal. The closer the financing level is to the price of the underlying, the greater the leverage.
Products that have a knock-out level often also have a ratio. The ratio shows how many products you have to purchase to follow one piece of the underlying asset. For example, if you have 1 turbo in your portfolio on Royal Dutch Shell with a ratio of 10, you are invested 0.1 times in the underlying share (Royal Dutch Shell).
All structured products have a Key Information Document (KID). This three-page document that describes the characteristics, risks and costs of the product. All of these elements can differ per product. The cost of a long position, for example, is a combination of the transaction fees charged by the broker and the financing costs of the issuer. Financing income and expenses are calculated by the issuer for the provision of financing (income for short products and expenses for long products). The financing costs can be found in the KID. The transaction fees charged by the broker in order to trade the product can be found in the broker’s fee schedule.
It is important to bear in mind that structured products are traded on an exchange. There might be a gap in the bid-ask spread (the price at which you buy or sell the structured product) on the exchange. Since you cannot lose more money than you invested with these products, the issuer can make an extra reservation in the event the product will be settled below the financing level. This is called the gap risk premium and it is included in the price of a product.
With structured products, the maximum loss that can be made is the initial invested amount. Among the risks involved with investing in structured products are liquidity risk, market risk and counterparty risk. For more information about these risks, please see this page.
The information in this article is not written for advisory purposes, nor does it intend to recommend any investments. Investing involves risks. You can lose (a part of) your deposit. We advise you to only invest in financial products that match your knowledge and experience.