The financial market has been abuzz with discussions about the impressive growth and potential of capital protected products. In the first quarter of this year, these products experienced a remarkable surge, witnessing a staggering 184% growth compared to the previous year and accounting for nearly 23% of the total volume sold. However, while this growth has been impressive, it is essential to look beyond the immediate horizon and consider the future trajectory of these products. With the Federal Reserve now discussing the possibility of a recession and the likelihood of a halt in interest rate increases, it is plausible to anticipate that the growth of capital protected products may soon plateau.
Amidst this shifting landscape, another category of financial instruments is capturing attention and making a remarkable comeback: income structured products. In April, despite an overall decrease in volume, the capital protected products experienced a significant contraction of less than half their previous month’s volume. In contrast, income sales maintained a steady monthly volume of $4 billion. This resurgence in the popularity of income structured products indicates their resilience and appeal in uncertain economic times.
One of the factors contributing to the success of income products is their exceptional performance year-to-date. A closer analysis of the daily performance of all live structured products in the US, when compared to the S&P 500 total return, reveals that income products have emerged as the top performers. This achievement can be attributed not only to their significant exposure to the S&P 500, which concluded April with a growth rate just above 7%, but also to the attractive coupons offered on phoenix autocalls with lower coupon barriers.
According to data from SPi, the year-to-date performance figures of various US structured products highlight the superior performance of income products. With a return of 7.98% and an average daily annual volatility of 3.99%, income products have achieved an impressive Sharpe ratio of 2.00. Comparatively, the capital protected SP Index achieved a return of 3.12% with an average daily annual volatility of 1.99% and a Sharpe ratio of 1.57. The Growth SP Index, despite its appeal, lags behind with a return of 6.80%, an average daily annual volatility of 5.29%, and a Sharpe ratio of 1.29. In light of these figures, it is evident that income structured products offer a compelling investment opportunity in the current market landscape.
As investors navigate uncertain economic conditions and seek financial instruments that can provide steady returns, income structured products have re-emerged as a viable and attractive option. Their consistent sales volume, coupled with their impressive performance and attractive coupons, make them a noteworthy alternative to consider. While the future of capital protected products remains uncertain, the resurgence of income products underscores their resilience and the value they bring to investors’ portfolios.
