Navigating the World of Structured Products with Arta

Have you heard of Structured Products?

These are unique investments that can be customized to fit what you're looking for when “off the shelf” just won’t do. And because they’re customized, they can be tailored to a range of investment objectives, from magnifying returns to managing risks.

At Arta, our exploration into these innovative investment vehicles has sparked a lot of interest. But, we've also realized that not everyone knows what these products are all about, how they fit into an overall investment plan, or if they're the right choice to meet a goal.

We're here to break down the complex stuff and make it easy to understand. Whether you're deep into investing or just getting started, we want to help you see where structured products might fit into your bigger picture.

What are structured products?

Structured products are customized combinations of various financial assets designed to achieve specific outcomes. The underlying assets might be corporate bonds, options, or equities—essentially, whatever mix is optimal for a particular goal. 

All structured products start with a goal. It could be an investment outcome, like generating income or reducing a portfolio's risk, or an investment thesis—for example, the investor has a strong view that the market will behave in a certain way in the future. Based on the goal, Arta will develop the strategy (e.g., selecting the underlying assets and how they should be structured) and then work with third-party bank partners to execute the strategy. 

With structured products, we're not just aiming for a goal with crossed fingers. Instead, everything's laid out in black and white: if certain things happen (let's call them ABC), then the result (or XYZ) is a sure thing. It's like setting up a deal where both sides know exactly what to expect based on the rules we agree on from the start.

How Arta does it differently

Financial advisors' access to structured products can be limited, and even those with access might find the complexities challenging to grasp due to the multitude of products they manage. This is understandable, given the nuanced nature of structured products compared to more common financial instruments. However, this doesn't always ensure that advisors are aligned with the best interests of their clients when recommending these products. 

At Arta, we're taking a different approach. Our team has extensive expertise in derivatives and structured products. More importantly, as a fiduciary for our members, we prioritize creating solutions that match our members' goals and best interests. In short, our recommendations are tailored to meet their financial objectives.

Typically, structured investments are available only to the very wealthy through financial advisors and usually come at a high cost (often exceeding 1% in annual fees or even larger upfront fees). Minimums are traditionally $500k or more. Arta offers structured products starting with a $25k minimum and annual fees of 0.50%. 

Arta creates and offers structured products in a limited window to reflect market conditions and fleeting opportunities. This makes them a perfect fit for Arta’s Builds series (coming soon), where we feature opportunities that are right for a given moment. We will offer many products over time, but any single structured product is custom-built to match the moment for which it was designed.

Because a third-party bank is involved in execution, credit risk is associated with these products. To mitigate that, Arta works only with banks that have been named “Globally Systemically Important Banks.” For example, our first two structured product offerings were executed with Goldman Sachs and JP Morgan Chase.

Types of structured products

Arta offers structured products in two ways:

1. We develop products each month based on current market dynamics and optimal structures for the conditions. These are offered as part of Arta’s Builds. 

2. We create “customs,” one by one,  where we work directly with investors willing to structure larger unique investments ($500k+) to match their individual situations. 

The variety of forms that structured products can take is virtually boundless, mirroring the vast spectrum of investors' objectives. However, there are fundamental elements that form the backbone of most products:

• Duration: Typically 1-5 years

• Underlying asset: The structured product is usually linked to the performance of an underlying asset like the S&P 500 index or the MAMAA stocks (formerly known as FAANG). However, given the customizability of structured products, the underlying asset can be almost any publicly traded security. 

• Downside protection: Some structured products guarantee 100% of the principal invested. Others might have some “buffer” or “trigger”.  For example, if the underlying asset decreases by less than 10%, the investor experiences no downside. If it’s down more than 10%, the investor begins to experience the loss. 

• Upside potential: Some structured products have multipliers on increases in the underlying assets. Much like the downside configuration, the upside may have some kind of buffer or trigger built in. For example, earn twice the return on S&P 500 gains, but only if the S&P 500 increases more than 10%. Generally, the greater the desired upside, the higher the exposure to downside risk.

• Exit triggers: Structured products may have an exit trigger based on whether an event occurs. For example, if an underlying asset, such as the S&P 500, increases in the next 12 months, the investment will be closed out with specific outcomes. Conversely, if the S&P 500 decreases in the next 12 months, the investment will continue to its full duration. These triggers can help tailor the overall return profile to better leverage the complexities of financial markets. Arta's derivatives team is continuously analyzing trade-offs to determine whether incorporating an exit trigger could be advantageous for your investment.

• Income: Some structured products generate income, also known as ‘coupons’. Typically, these coupons are “contingent,” meaning they are only earned if certain market conditions are met. By intelligently designing these contingencies, Arta’s derivatives team can assist in creating a structure with the potential to significantly surpass the fixed-income yields typically found in comparable bank accounts or corporate bonds.

As you can imagine from the breadth of these dimensions, there are numerous settings and adjustments at our disposal. So, the structured product will ultimately involve trade-offs between these dimensions. For example, there may be a high degree of protection on the downside, but the trade-off might be limited upside. 

Based on how these dimensions come together and the investment objective they’re aiming to achieve, our Builds tend to fall into a few broad themes: 

• Rally: These are Builds focused on magnifying returns in a rising market scenario. The “2x the S&P 500 return over the next three years'' structured product is a good example. 

• Protect: These Builds focus on principal protection in uncertain or risk-averse situations. 

• Income: These are structured to pursue an income stream over time.

We’ll introduce more themes over time based on circumstances and outlook.

Risks and other considerations

While all investors have goals, structured products aren’t for everyone. Some key considerations should be considered.

• Limited liquidity: Many structured products have a holding requirement, such as three years. While it may be possible to withdraw your funds before the term is over, liquidity is not guaranteed, and you could lose principal, depending on market circumstances.

• Tax implications: Any investment income or capital gains received from structured products are taxable. These products have complex tax requirements. As always, speak with your tax advisor to understand the tax-related implications. 

• Performance is dependent on underlying assets: Because structured products are constructed by combining several underlying assets, their performance will ultimately depend on those assets. 

• Credit risk: When structured products are constructed using corporate bonds, your principal is subject to the bond issuer's credit risk. That’s why we only collaborate with “Globally Systemically Important Banks.” Historically, investment-grade bonds carry more risk than U.S. government bonds but less risk than investing in the stock market. 

Who are structured products for

Investors in structured products are usually trying to address a specific issue. They may be aiming for index-beating returns and are willing to sacrifice some liquidity to achieve this. They might need to manage risk in a way that they’re unable to with “off-the-shelf” securities. They may have an investment thesis that publicly available securities just don't efficiently capture. For example, an investor may be highly optimistic about a certain group of companies but also seek to protect against a catastrophic downside scenario for those firms.

These investors share a common challenge: they haven't found an existing solution that meets their needs. Generally, they are more financially savvy than the average investor and are prepared to commit their funds to the lifespan of the structured product.

Head over to the app to learn more about custom structured products. Arta offers free consultations for interested members. We can help you determine if these products might be right for you and guide you through the process once you're ready.