What Are Structured Funds?
Structured funds are a type of fund that combines both equity and fixed-income products to provide investors with a degree of both capital protection and capital appreciation. These funds typically invest the majority of the portfolio in fixed-income securities to give the fund capital protection often with principal repayment and the added gain of interest payments. Structured funds also use options, futures, and other derivatives, often linked to market indexes, to provide exposure to capital appreciation.
Key Takeaways
- Structured funds are a type of fund that combines both equity and fixed-income products to provide investors with a degree of both capital protection and capital appreciation.
- These products are attractive to investors seeking conservative investments with downside protection who would also like to see gains from upside movements in the markets.
- Generally, structured funds will guarantee a portion of the total investment: for example, if an S&P 500 structured fund protects 80% of its principal, this means that it will invest 80% of its funds in fixed-income products with little chance of falling below the principal amount.
How Structured Funds Work
Structured funds are managed portfolios offered to market investors in various ways. They are one form of structured product commonly available to retail investors.
These products are attractive to investors seeking conservative investments with downside protection who would also like to see gains from upside movements in the markets. Exact products and guarantees will vary depending on the fund. It is common for investors to identify these funds through their brokerage platform. They may be advertised along with money market funds or included as an option with more complex banking products. These funds can use certificates of deposit as the fixed-income portion of the investment.
Structured funds invest in both fixed-income investments and derivatives. They are often linked to market indexes. They typically do not offer liquidity and must be held over a specified time period. The majority of the fund is invested in various types of fixed-income securities, which necessitates the long-term holding period for investors. The remaining portion integrates the market-linked component through the use of derivatives. Approximately 20% of the assets held in structured funds are invested in swaps, options, futures, and other derivatives that are linked to the return of a market index. This portion of the fund seeks to generate an added return for investors.
Structured funds can be a good investment for investors seeking long-term capital preservation with upside potential. They can offer returns beyond standard money market funds and high-yield savings accounts.
Generally, structured funds will guarantee a portion of the total investment. For example, if an S&P 500 structured fund protects 80% of its principal, this means that it will invest 80% of its funds in fixed-income products with little chance of falling below the principal amount. The rest of the fund is invested in derivatives that are exposed to the S&P 500 index. The investor will gain as the S&P 500 advances and can experience losses as it falls, but the fund won't fall below 80% of its starting value.
Structured Fund Investing
Fidelity offers investors the option to invest in structured funds through its platform. It offers funds linked to the Euro STOXX 50 Index, S&P 500 Index, S&P 500 Low Volatility High Dividend Index, and the Dow Jones Industrial Average.
Goldman Sachs is the primary issuer of the structured fund portfolio linked to the Dow Jones Industrial Average. The fund invests the majority of the portfolio in certificates of deposit. It uses a cap rate of 50% to 58% for the returns of the Dow Jones Industrial Average.
