At the recent SRP Americas conference I presented some current US product examples, drawn from some of the highest sales volume issuances in the last couple of years.

These products are shown in Figure 1 below:

These products represent a good cross section of high selling products in recent years. The product types are relatively simple and the underlyings are drawn from obvious choices, heavily featuring US indices and headline stocks. Many of these products are linked to single underlyings and four such types feature here. Innovation and diversification are becoming increasingly important in the US market, but alternative indices plus less well known and risky stocks tend to have smaller issuance size as they are niche choices.

The largest product by issuance size is the first on the list issued by JP Morgan and linked to Meta. It is a three-year protected growth product but because of the slightly unusual 110% issue price, its stated protection at the 100% level does not equate to full protection of the investor’s principal but does fully protect just under 91% of principal. By not offering full protection, better terms can be achieved with 84% participation at a strike of 119%, requiring some growth in the stock to pay a higher return. It also features 1.25% interest per annum and a “make whole” condition which is equivalent to a puttable condition for a convertible bond.

Using Monte Carlo and backtesting analysis we can obtain tables of potential outcomes of the product as shown in Figure 2 below:

This product clearly has appeal because of the partial capital protection and linkage to one of the most important stocks in the US market. However, results for both backtesting and forward-looking simulation show that the chance of losing some capital is significant. The likelihood of being in positive territory is just over 50% from backtested data, and even less than a simulation that does not assume any excess growth.

The next product is a leveraged return note from Barclays with the second highest sales volume of the set. This is a classic structure with a maturity of just over 1 year and 150% leverage on the SPX, capped at a maximum return of 114.36% of the invested amount - achievable if the SPX gains 10% or more. This product has full downside risk but represents an excellent way of boosting returns with limited market growth. Currently, such a product would make sense when many investors think that further market growth will be limited.

Two other choices linked to the SPX are the dual directional and digital examples, issued by Goldman Sachs and CIBC.

The dual directional has 150% participation on upside up to product cap of 120%, and 100% positive participation on downside down to 85%, then losses occur. The digital example pays 17.81% in just over two years if the index finishes above 82.5%. Otherwise, if the index is below this level capital is lost on a geared basis to reach zero payout at a zero-index value.

Both products also make a lot of sense in today’s markets and have some claim to be nearly market neutral yet providing returns significantly more than the risk-free rate for a market outcome consistent with the product’s positioning.

The dual directional captures positive return for the first portion of market growth or loss over the investment term. The return is capped but protected on the upside but on the downside, capital would be lost below the downside barrier. The digital product has great defensive properties and will pay nearly 8% a year equivalent even if the index falls up to 17.5%.

The final example is an Autocall linked to the worst of the three indices (Nasdaq-100, Russell 2000, and SPX-500) paying 10.2% quarterly fixed with a level Autocall schedule monthly from six months and with a 70% European barrier.

This product has the typical profile of Autocalls with constant Auto-call level, with a Monte Carlo simulation on a neutral scenario as shown in Figure 3:

The highest likelihood is of calling at the first point after six months. Subsequent call probabilities are much lower, partly because the product may have already called. Additionally, if it has not called by an earlier date at least one index must be below the threshold which makes a future call less likely.

These examples show the variety and simple messaging and positioning of current mainstream US structured products.