I came across a LinkedIn post recently from a Canadian bank celebrating how many structured notes they’ve sold.
That should make investors pause.
Because whenever something is being pushed that hard, it’s worth asking a simple question:
What am I giving up?
What Are You Really Buying?
Structured notes are often positioned as the “best of both worlds”:
- downside protection
- some level of income
- exposure to equity markets
But at their core, they are not investments in the market.
They are debt issued by a bank, combined with derivatives, designed to produce a very specific outcome.
Instead of owning the market, you’re buying a packaged experience.
And that experience typically comes with:
- capped upside
- limited liquidity
- multi-year lock-up periods
- and a level of complexity that most investors don't fully understand
They are engineered to sound simple. But they are anything but.
The Illusion of “Income”
One of the biggest selling features of structured products is “income.”
But not all income is created equal.
There are meaningful differences between:
- Interest income (predictable, fully taxable)
- Dividend income (tax-efficient, tied to company earnings)
- Capital gains (deferred, often the most efficient long-term)
- Return of capital (not income at all, simply your money coming back)
Structured products blur these lines.
The “income” they advertise is often manufactured — derived from option premiums, derivative structures, or engineered payout formulas.
In many cases, investors believe they’re earning income… when in reality they’re participating in a complex payoff structure.
If it takes a whiteboard to explain where the income is coming from, it’s probably not as straightforward as it sounds.
The Real Cost: Capped Upside
The biggest issue with structured notes doesn’t show up right away. It shows up when markets recover.
These products are often sold during periods of uncertainty, when downside protection feels especially valuable. And early on, they can appear to work as intended.
But markets don’t stay uncertain forever, they rebound. And when they do, many structured notes limit how much of that upside you actually capture. This matters more than most investors realize.
Market returns are not smooth. They tend to come in short, powerful bursts. Missing even a small number of those periods can significantly reduce long-term outcomes. When your upside is capped, you don’t fully participate in those recoveries.
That’s not a temporary trade-off. It’s permanent.
A Simpler Alternative
What’s often overlooked is that you can replicate the intent of a structured product in a much simpler and more transparent way.
Instead of buying a structured note, an investor could:
- allocate a portion of capital to a strip bond to lock in future principal
- invest the remaining capital in a diversified equity portfolio
For example:
- invest ~$75,000 in a strip bond that grows to $100,000 over time
- invest the remaining ~$25,000 in equities
This creates a similar concept of principal protection.
But with one key difference: There is no cap on the upside.
You maintain:
- full participation in market growth
- daily liquidity
- and complete transparency
It’s the same idea, just without the complexity and embedded costs.
Why Are These Products Pushed So Hard?
If simpler, more transparent solutions exist, why are structured products so widely promoted?
There are a few reasons.
- They Are Highly Profitable
Structured products include embedded margins through fees, spreads, and derivative pricing. Much of this is not visible to the end investor. - They Manufacture Demand
In uncertain markets, investors naturally seek protection. These products are designed to meet that emotional need with a compelling narrative. - They Are Difficult to Compare
Because they are proprietary, structured products are harder to benchmark against traditional portfolios. That makes it more difficult for investors to evaluate their true cost. - They Lock In Capital
Multi-year terms and limited liquidity help keep assets within the institution. - They Fita Sales Model
They are easy to position in a headline: “protected with upside” but far more complex in reality.
These products are often sold, not discovered.
The Bottom Line
Structured products are not inherently bad. In certain situations, they may have a role.
But more often than not, they introduce unnecessary complexity and trade-offs that are not fully understood.
Good investing does not need to be engineered to sound sophisticated.
It needs to be:
- transparent
- liquid
- and grounded in real sources of return
Because over time, simple and disciplined portfolios can be effective over the long term. If you have any questions, our team is always here to help.
