Structured Notes
A Complete Guide to Understanding and Using Them in a Portfolio
Structured notes are one of those financial tools that many investors have heard of, but few fully understand. In the United States, they’re often underutilized, especially when compared to Europe and Asia. When used strategically, they can be a valuable part of a well-rounded portfolio.
This article will break down:
What a structured note is
How they work
Different types of structured notes
Potential benefits and risks
Where they fit into a broader investment strategy
By the end, you’ll have a clear understanding of whether this is something worth exploring with your advisor.
1. What is a Structured Note?
A structured note is a debt security issued by a major financial institution (usually a bank), but instead of paying a fixed interest rate like a traditional bond, its returns are tied to the performance of an underlying asset.
That underlying asset could be:
A stock index (like the S&P 500)
A basket of stocks
Exchange-traded funds (ETFs)
Interest rates or commodities
The note combines:
A bond component – to provide principal protection or income.
A derivative component – to link returns to the performance of the chosen underlying asset(s).
Think of it as a custom investment where the bank says, “Here’s the amount of income or growth potential you’ll receive, here’s the downside protection we’re building in, and here are the rules for how it works.”
2. How Structured Notes Work
While there are many variations, most structured notes share some common features:
Issuer – A large, investment-grade bank.
Term – Typically 1–5 years.
Underlying Asset(s) – Determines the return potential.
Payout Structure – How and when income or growth is delivered.
Protection Level – The amount of buffer against losses.
For example:
Imagine a 3-year structured note tied to the S&P 500, Nasdaq, and Dow Jones with a 30% downside buffer and a fixed annual income of 10%.
If the three indices drop less than 30%, stays flat, or no more than two of the three go up — you receive your coupons totalling 10% annually.
If these indices drop less than the downside buffer (30%), your principal is fully protected. In other words, if there is a 29% drop you, a) continue receiving coupon payments, and b) haven’t lost any of your initial investment.
If an index drops more than your downside buffer (30%), you do incur losses. This is why we diversify through several note purchases in any one portfolio.
3. Types of Structured Notes
Structured notes generally fall into two broad categories:
A. Income Notes
Designed to generate predictable cash flow, often paid monthly.
Coupon payments are made as long as the underlying asset(s) stay above a set “coupon barrier.”
Useful for investors seeking income in a volatile environment.
B. Growth Notes
Focused on capital appreciation rather than income.
Return is linked to the performance of the underlying assets.
Suitable for those looking to participate in market growth with certain risk parameters in place.
4. Why Structured Notes Can Be Useful
When constructed and managed properly, structured notes can address several investment goals:
Income Generation – Attractive yields compared to traditional fixed income.
Downside Protection – Buffers or full principal protection in some designs.
Diversification – Exposure to different asset classes or market segments.
Customization – Terms can be tailored to match an investor’s specific needs and risk tolerance.
Performance in Volatile Markets – Income-focused notes, in particular, can perform well in sideways or choppy markets where traditional equity growth is limited.
5. Risks and Considerations
Like any investment, structured notes are not risk-free. Key considerations include:
Credit Risk – You’re relying on the issuing bank to meet its obligations.
Liquidity – They’re meant to be held to maturity; but you do have daily liquidity.
Market Risk – If the underlying assets fall below protection levels, you can lose principal.
Calling of Notes – Some notes may be called (redeemed early) if conditions are favorable to the issuer, which can cut short income streams. In this circumstance, all capital is returned to the investor and the investor keeps all potential income that was generated through the life of the note.
6. How They Fit into a Portfolio
Structured notes are best viewed as a complement to traditional investments, not a replacement.
They can:
Sit alongside fixed income – providing higher yields while still maintaining some protection.
Add an income stream – supporting a multi-stream approach to cash flow.
Reduce volatility – offering buffers against market downturns.
At Axiom Wealth Solutions, for example, we incorporate income and growth structured notes for clients as part of a diversified strategy. Instead of buying one or two notes all at once, we use a dollar cost averaging approach over 6–9 months. This means:
Investing in several notes per month
Diversifying across issuers, underliers, and market entry points
Reducing the risk of overconcentration in any single note
Over time, this can create a laddered, well-diversified income or growth portfolio that aligns with broader financial goals.
7. The Global Perspective
Structured notes have been around since the 1980s and are widely used in Europe and Asia. Globally, the market is worth trillions of dollars, yet the U.S. adoption rate has historically been much lower. That’s changing — U.S. issuance reached roughly $149 billion in 2024 — as more investors recognize their potential.
Key Takeaways
A structured note is a bank-issued investment combining a bond and a derivative, linked to underlying assets.
They can be designed for income or growth — with varying degrees of protection.
When managed strategically, they can enhance income, diversify a portfolio, and provide protection against downturns.
They’re complex instruments, so understanding the terms and working with a knowledgeable advisor is essential.
Stay tuned for more articles if you are interested in educating yourself on financial strategies.
Mike Bargetto
Financial Advisor
Axiom Wealth Solutions
The information contained herein is provided for educational purposes only and the information should not be construed as a provision of personalized investment advice. Under no circumstances should this information be construed as an offer to sell or a solicitation of an offer to buy a particular product or service. Past Performance does not guarantee future results.