Introduction
There’s a new addition to the market of investments, and it is ETFs. For all the good reasons, it’s catching up with an increasing momentum amongst investors. Let us check what is Structured Notes VS. ETFs.
ETF refers to exchange-traded funds. You can buy and sell ETFs similarly to buying/ selling stocks and shares. Similarly, the prices of ETFs also keep fluctuating throughout the day as shares or stocks work.
However, unlike individual shares or securities, ETFs comprise different forms of tradable instruments like shares, bonds, derivatives, and commodities. Therefore, ETF combines a fixed interest rate and a variable component under the same umbrella.
Structured Notes refer to notes that comprise a debt fund that is linked to an underlying asset or investment allocation like shares, stocks, equities, and futures. The performance of the linked asset directly impacts the returns on investment the structured notes can carry.
Major Differences Between Structured Notes and ETFs
In this segment, we are specifically going to see the main points of differences for Structured Notes Vs ETFs. Let us have a look into each one of them:
- Customization
Structured Notes have debt instruments linked to an asset or investment allocation. And, structured notes can be customized according to an independent investor’s needs or preferences. Whereas ETFs are standardized trading instruments offering little scope for customization.
- Issuing authority
Structured notes are more sophisticated financial instruments that are issued by large investment banks or financial corporations. Whereas, ETFs are recently introduced financial instruments that are issued by an ETF issuer or whom you see on Financial TV segments.
- Capital Preservation
Structured notes with principal protection are meant for risk-conscious investors who would want to preserve a major portion of their capital amount irrespective of whether they accumulate added gains on their investments or not.
The fixed debt obligation with a capped sum helps most of the investors get their principal amount at the time of maturity. This is irrespective of whether the investment index goes higher or performs adversely in the market.
Whereas, ETFs are newly introduced trading securities that are highly volatile. Therefore, ETFs are meant for investors only if they can handle a certain degree of risk appetite inside their investing wallet.
- Exposure to the Marketplace
Structured Notes are a mix of debt-based fixed components and investments or asset-like components like shares, stocks, equities, futures, or commodities.
Therefore, investors must have a wider exposure to the marketplace. They must have exposure to primary as well as secondary markets to know how the fixed debts and investment-based shares are performing in the marketplaces.
In the case of ETFs, the investors perform live trading at the primary marketplace similar to how shares, equities, futures, and options are traded.
- Liquidity
Income notes or structured Notes cannot be sold that easily unless the investors decide to keep them until the period of maturity. As these are instruments that depend on the performance of the asset they are linked to, the buyers are not sure about the Returns of Investment. To invest in structured notes, a higher degree of risk handling may be required. Therefore, as an investor, you may find it a little complex to have them sold to reliable buyers.
Whereas ETFs are more easily tradable and are more liquid if the investors try selling them during live trading hours in the primary stock exchanges.
- Risk Appetite
As structured notes comprise a debt fund and an investment fund, the notes are mainly handled by institutional or wealth-managing investors who can handle a better degree of risk appetite or downside protection potential.
ETFs have a credit cover coupled with a derivative component and operate similarly to how the stock exchanges operate. Investors can buy or sell these instruments every day at the primary marketplace and that too during live trading hours. These are instruments that are highly liquid too.
Therefore, the risk appetite is lower with ETFs as compared to Structured notes. The bottom line here is that first-time investors can also have a go at it.
- Volatility
Structured Notes are not volatile as investors wait for the notes to gather a hike in prices over some time. They wait until the notes mature after five to ten years down the line. Therefore, aggressive bullish, bearish, or flat market conditions do not bother the investors much.
ETFs are traded in stock exchanges wherein investors aggressively buy and sell the instruments during trading hours. The instruments therefore are highly volatile wherein bearish, bullish, and flat-market trends do form a sizeable impact on the commodity markets. Halo investing can be an alternative to ETFs.
- Access to Emerging Market Trends
In our bid analyzing Structured Notes Vs ETFs, here is an interesting factor to consider. Structured Notes depend on emerging market trends to a greater extent as it has a debt component that is linked to the performance of an asset like say a stock, share, or an option. The investors must therefore keep track of emerging market trends to know how their investments are performing.
ETFs are newly introduced in the marketplace and investors are yet to gauge emerging market trends concerning this particular financial commodity. As of now, ETFs are held more generic as compared to a specific structured product that comes to investors with a maturity date and coupon payments. Retail investors are immensely gaining returns through the purchase and sale of these investments.
Similarities between Structured Notes and ETFs
We have seen the main points of differences between Structured notes and ETFs. Now, let us look at a few similarities between both financial instruments. This way, investors will have a better understanding of how each product works.
- Investment Objective
Both structured Notes and ETFs work with equities, trades, credit notes, mortgages, commodities, futures, and options. The ratios and percentages may differ from product to product. Therefore, investors may look for principal protection, long-term growth of capped funds, and wealth accumulation when they own both notes and ETFs.
- Accessible to Retail Investors as well as Amateurs
The structured notes were previously accessible only to posh and sophisticated retail cum institutional investors. High-holding banks and institutional corporations were distributing them to high-end investors only.
Whereas now, structured notes are also distributed to amateur retailers or investors who do not have much knowledge of dealing with trades. The newbies are made to learn as they come up with their learning curves.
Similarly, ETFs are newly introduced securities with a mortgage or credit element added to them. Therefore, newly established retail investors are also having a go at it.
- Green Investment Drive
Both ETFs and structured notes need not be procured in their physical form. You can procure them online and sell them online too. Therefore, both financial instruments support the green investment drive. Retail investors, therefore, need not worry about the paperwork that needs to be done concerning buying and selling notes or ETFs. All types of growth notes can now be managed via online portfolios.
- Wealth Baskets can be Created
Wealth managers can create customized and tailor-made wealth baskets for both ETFs and structured product portfolios. The investor’s immediate, medium-term, and long-term investment objectives are gauged at the beginning or creation stages. The financial products are then put into their respective wealth baskets.
- Exposure to Asset Classes
Both ETFs and Structured notes comprise a mix of mortgage bonds, debentures, equity, shares, options, futures, commodities, credit notes, and high-paying currencies. Therefore, investment holders of ETFs and notes get wider exposure to asset classes simply and cost-effectively.
- Convenience
ETFs and structured notes have their initial design or structural outlay created by brokers or independent financial managers. Therefore, as a retail or newbie investor, you need not waste time in asset selection.
The tradable securities are designed in such a way that you get your minimum principal along with the returns of the promising asset value.
Everything is taken care of and you need not be watching market movements or charts every microsecond.
Therefore, owning ETFs and notes gives investors a better degree of convenience or flexibility in buying or selling the instruments.
- Research Analysis
The heavy-lifting research or analysis, for ETFs or notes, is already done for you during the selection period itself. The investors just pick trade instruments that can cater to their short-term, medium-term, or long-term financial goals. The investment components have been assembled using the right combination of underlying assets that optimize your themes or objectives. Therefore, the risk/ return payoffs are optimized for investors in most cases.
Key Takeaways
While ETFs can be traded in public stock exchanges or trading markets, structured notes offer flexibility or specificity to the products that are chosen. The similarities and differences that have been portrayed here tell investors how both these instruments are so very different in concept yet they work towards improving the wealth portfolio of growing investors.
ETFs offer wider exposure to live markets as they can be bought or sold every day and investors need not hold them over a long-term period. However, with structured notes, most of them come to investors through a pre-defined maturity period and therefore promise capital and returns for risk-conscious investors too.
You can also choose online portfolios that provide seamless access to dealing with structured products and ETFs. Taking expert help is always recommended for better investment choices.
