- There is credit risk from the underlying issuer. Yes, I agree, the issuer (Barclays, Morgan Stanley, etc) could go bankrupt and that would be a risk
- There are high fees or commissions associated with them. If you read the prospectus, the brokerage will make 2-5% of the note value for selling the product. However, that commission does not change the terms of the note - it is baked into the offering. So usually that brings the next point:
- You can probably buy the options and bonds and make one of these yourself. I've tried to match or beat the terms on structured notes and have not been successful. I think this is because they have pricing power as well as access to custom derivatives that I don't.
- And finally, the performance of the notes usually doesn't include dividends which means your return on the structured note is lower. This is a valid point in that for some downside protection, you are giving up some potential gains. But some notes offer enhanced returns such as this one:
Here's the basic features:
- 5 year note tied to the lesser performing of the Dow and the S&P 500
- If at the end of 5 years, the lesser performing is up, you will receive your initial investment plus 2X return
- If at the end of 5 years, the lesser performing is down less than 40%, you will receive your initial investment back
- If at the end of 5 years, the lesser performing is down more than 40%, you will lose the same percentage
What am I missing that would make this a bad idea? Does anyone know how I can recreate the structure of this note on my own?