As interest rates started to climb from historic lows in 2022, the traditional hedge against stock market volatility was gone. Bond funds lost an average of 15% that year. Knowing that a decline in return for bonds was coming, our investment committee chose to use structured notes to lock in higher yields and build in a hedge against stock market volatility. It’s been a successful strategy in outperforming bonds and providing a monthly income or dollar cost average into other portfolio investments to achieve better performance.

The income structured notes that we have in our portfolios use common stock market indexes for the base performance factor. We then build in downside market protection in the 30% to 40% range and pair that with a monthly yield that is dependent on time and protection level. The notes are products of the major money center banks like Citigroup, JP Morgan and others. In 2022, we were seeing yields in the 8% to 10% range while intermediate term bond funds lost 15% or more. The downside protection comes into play at maturity. As long as the indexes haven’t declined beyond the protection level, 100% of the principal is returned.

Using structured notes allows us to realize our goals of adding downside protection, increasing yield, managing maturity time and customizing protection levels. Yield levels change all the time depending on the ups and downs in the stock market. The issuers do have the option to call a note. If they do call a note before maturity, 100% of the purchase price is paid back to the buyer. When that happens, we’ll typically reinvest in a new note, usually at a lower interest rate. Expect to continue to see structured notes in your portfolios. If you have any further questions, please contact your advisor.