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Structured notes have emerged in recent years as a new, exciting investment opportunity quickly being absorbed into the mainstream financial services industry. $64 billion in structured products were issued in the U.S. in 2006, a 33 percent increase from 2005, according to the Structured Products Association. It is speculated that the structured products market will break $100 billion in 2007.
Structured notes should not be confused with other investments that have been hit hard by the credit crunch and subprime mess, including collateralized debt obligations and structured investment vehicles. Structured notes are financial instruments that combine derivatives with equity or fixed income, resulting in customized risk and return profiles.
Because profiles can be structured to match any investor’s comfort zone, the notes offer a way of investing in an asset class that would otherwise seem too risky, Bob Gordon, president of Twenty-first Securities, said. Some types of structured notes, such as exchange-traded notes (ETNs), are favorable from a tax standpoint as well. ETNs—which are distinct from exchange-traded funds (ETFs)—may be tax-deferred until they are traded or reach maturity. Additionally, ETNs that are held for longer than a year receive long-term gain treatment.
“I think there are tax advantages to the capital gains treatment in the structured notes which can’t be matched by other investments that are out there,” Gordon said.
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Author: Melana Yanos
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