INVESTING IN MARKET LINKED NOTES
- Is it possible to participate in the profits of the stock market – without the downside risk?
- Is there a free lunch?
- Market Linked Notes: Combining stock market returns with downside protection
Market Linked Notes are investment products that provide stock like returns in up-markets, with capital protection in downmarkets. They are hybrid stock/note instruments that have a fixed holding period. They are generally issued by major banks.
The return from the notes are based upon the performance of a well-known Market Index such as the S&P 500.
The payment at maturity is a percentage of the market return over the holding period of the note. If the market index return
is negative over the holding period, the note can guarantee full principal return or provide limited downside protection.
Typical features of Market Linked Notes are
- Term of 2 years to 10 years
- Downside protection or Zero downside guarantee
- Returns of 60% to 200% of an index such as the S&P500
- Other conditions can apply to the notes such as callable etc.
Market linked notes are suitable for
- Risk-reduction with equity upside participation
- Higher returns than typical risk-free investments, with access to downside protection
- Producing long term gains and avoiding short term tax ramifications
So is there a Free lunch? – yes, if you can wait
- Need a time horizon of about 2-10 years – notes are meant to be held to term and there might not be a market for selling prior to maturity
- Notes do not pay interest – notes do not pay dividends like stock. The full value is realized on the maturity date so it is suitable for people who are not immediate dependent on the interest income
The Veda Financial process and why it works
- At the beginning of every month we receive a new inventory about 200 of Market Linked Notes from major issuers such as JP Morgan, Goldman Sachs and others
- The selected notes are then acquired for our client portfolios, through TD Ameritrade
- All notes are analyzed according to their return, downside protection, term and several other features. The selection is then optimized for the best risk/return features.
- These acquisitions can be ongoing with investments in Market Linked Notes with diversification across various parameters
Veda Financial is unique in the way that we actively look for these offerings for clients, as market conditions change
Examples of Market Linked Notes
These are actual notes which were issued previously. Current offerings might not offer the same features
Guaranteed note with 125% of
market return, and 0% downside
Equity Index-Linked Certificates of Deposit Due 2027: This was a 7.5 year note issued by a major bank such as Goldman Sachs with at least 125% upside market participation in the S&P 500 index, and guaranteed return of capital. It provides a return upon maturity at least 25% higher than the market return on that date, with full downside protection. It provides opportunity for capital protection as well as stock market participation.
You should not invest in these products without reading the full investment brochure
Market Linked Note with 150% of market return,
with 30% downside protection
5Yr IN DU/RTY Trigger Return Enhanced Note: This is a Morgan Stanley issued 5 year note with 150% upside participation in the INDU Dow Jones Industrial Index & Russel 2000 index. There is a downside protection of 30% ( ie full return of initial capital down to markets -30% from Issuance)
