Understand "structured products" in one article, 100% capital protection?

This year, due to tariff policies and disturbances in economic data, the market has been experiencing severe fluctuations, making trading increasingly difficult. Many investors may find that their profits become a lost cause. In this situation, what strategies can provide us with both 'capital protection and yield flexibility'? Perhaps structured products can serve as our 'double-sided shield'.

So, what are structured products? Who are they suitable for? How should we choose them? What risks should we be aware of when investing?

1. What are structured products?

What are structured products? For many, structured products offer an investment opportunity that is "offensive and defensive", providing security on the downside while allowing for great upside potential, thus drawing a lot of attention.

So, is this notion really correct? After reading this article, one will likely have a more comprehensive evaluation.

Structured products are investment tools issued in the form of notes, consisting of "Fixed Income products" + "Financial derivatives". Among them, Fixed Income products provide defense (complete or partial protection of principal); derivatives are responsible for offense (enhancing returns). Typically, issuing institutions generally invest most of the funds in Fixed Income products. For example, Bonds, deposits; a small portion is invested in derivatives, such as options and Futures, to seek high returns.

In summary, structured products are like LEGO blocks, where small blocks can be assembled into various objects, such as Autos, houses, bridges, etc. The blocks represent common financial tools like Stocks, Bonds, options, etc. By using different assembly methods, different structured products can be created to meet diverse investment needs.

2. General characteristics of structured products.

So, what are the characteristics of a typical structured product? We can summarized it into five aspects.

1. Fixed investment period.

Structured products have fixed investment periods. For example, if a product is combined with an option that has a term of three months, then the investment period for that product is three months. In recent years, the shortest term for structured products has been three months, with an average term of about three years.

2. Principal protection.

Structured products usually offer full or partial principal protection. This means that when investors hold the product until maturity, they can at least recover part or all of their principal. Of course, principal protection can only be realized if held to maturity. Therefore, when buying a structured product, one should be mentally prepared to hold it until maturity.

3. Returns calculated based on specific formulas.

The return calculation for structured products is usually based on specific formulas to meet certain market requirements or investor needs. The factors in the calculation formula generally include: the value of the underlying asset or portfolio at the initial moment, the value at maturity, the investment period, and the participation rate. The 'participation rate' acts like a multiplier or leverage, which can be greater than, equal to, or less than 100%.

For example: Suppose we invest 100,000 HKD in a structured product with a participation rate of 90%, and the return rate at maturity is 10%, then the amount to be recovered at maturity = 100K + 100K * 90% * 10% = 109K.

4. Role of derivatives.

As seen from the above tutorial, structured products incorporate derivatives, with relevant symbols including indices, CSI Commodity Equity Index, MMF, Stocks, etc.; product types can generally be divided into Call and Put.

There is a wide variety of symbols.

The returns of structured products can be linked to a wide variety of symbols, including but not limited to Bonds, Bond market indices, Stocks, Stock market indices, Commodities, Forex, and various combinations of Assets. Of course, structured products that target Stocks and stock-related indices make up the majority, which will be the main focus of the following discussion.

Three, classification of structured products.

According to two core dimensions of 'capital protection' and 'linked symbols,' structured products can be divided into various types, and investors can choose corresponding products based on their expectations for the performance of the linked assets.

1. Classified by 'degree of capital protection'

Structural products can be roughly divided into three categories based on the level of principal protection.

(1) Completely capital-protected products: Based on capital-protected notes, they usually provide 100% principal protection. The minimum return is the recovery of the initial invested capital, and when the performance of the underlying asset meets expectations, additional income may be generated. For example, some Sharkfin notes and Digital Structure Notes have the potential for complete capital protection.

Some principal protected products: This means that the investor's principal is usually only partially protected. These products have a preset value floor, such as 90% principal protection, with the maximum risk being a loss of 10% of the principal. For example, Snowball notes and Buffer Notes.

(3) Non-capital protected products: These products do not guarantee the principal and feature enhanced yield characteristics, but usually have a yield cap. For example, if the underlying asset increases by 20%, but the product terms set a cap of 12%, then the maximum return for investors will not exceed 12%, with the maximum risk being a total loss of principal.

2. Classification by 'linked assets'

Based on the categories of linked assets, structured products can be divided into equity-linked, interest rate-linked, credit-linked, exchange rate-linked, commodity-linked, and other varieties.

(1) Equity-linked: Linked to a single stock, a basket of stocks, or an index, primarily consisting of fixed income securities and a stock option contract, with the floating income at maturity determined by the price movement of the linked stock. For example, the most common equity-linked notes (Equity-Linked Note, ELN) typically offer 100% principal protection, but depending on the structure, some products only provide partial capital protection or no protection at all.

(2) Interest rate-linked: Usually composed of ordinary Bonds + various interest rate derivatives, the product's yield is determined based on interest rate trends (such as LIBOR, SOFR). Due to the wide variety of interest rates and Bonds, corresponding interest rate derivatives are also complex and varied, so the corresponding interest rate structured products also have different styles. For example, Range Accrual Notes and Reverse Floating Rate Notes.

(3) Credit-linked: Credit-linked structured products are a combination of ordinary fixed income securities and credit derivatives, with product returns linked to the credit status of a reference entity (such as delayed repayment, failure to pay, bankruptcy, restructuring, etc.).

(4) Exchange Rates Linked: Linked to exchange rates, future returns are somewhat determined by changes in exchange rates. The product can usually be divided into two parts: Fixed Income securities + exchange rate derivatives, mainly including Dual Currency Notes and Indexed Currency Option Notes.

(5) Commodity Linked: Linked to the prices of specific commodities (such as Gold, Crude Oil Product, etc.), the product returns are related to changes in the prices of the linked commodities. For example, Gold Shark Fin Notes, Crude Oil Product Range Accumulation Notes, Commodity Index Snowball Notes.

Due to the significant differences in products of various structures, in order to facilitate mooers' learning and understanding, the focus will next be on two types of retail structured products that ordinary investors also have the opportunity to participate in, namely Shark Fin Structured Notes and Binary Structured Notes.

IV. Teaching Examples of Structured Products

1. Shark Fin Structured Notes

Shark Fin Structured Notes are principal-protected structured notes named for their yield curve resembling the shape of a shark fin above water. The most common type is the Bull Shark Fin (Bull Knock out PBPR ELI), and the key takeaways will be shared in conjunction with the Bull Shark Fin.

(1) Operating principle: The core of principal-protected notes lies in the combination of 'fixed income + derivatives'.

Principal protection: Most of the funds are invested in zero-coupon Bonds or deposits and other Fixed Income Assets to ensure full return of the principal at maturity.

Yield enhancement: The remaining funds are used to purchase derivatives. If the underlying asset rises, the investors can Share in the profits; if it falls, only the amount invested in derivatives is lost.

(2) Investment scenario: Performs better in a fluctuating or moderately rising market and is suitable for conservative investors.

(3) Product design: Taking a "Call shark fin structure" as an example, let's first understand its core elements and profit model.

Hooked symbol: Hooked to HKEX.

Minimum Redemption Price: the guaranteed minimum principal return ratio; that is, the minimum maturity yield is 102.56%.

Knockout boundary: a key triggering condition that determines whether the product terminates or triggers specific profit distribution; the knockout boundary is set at 105%, meaning that when the HKEX price exceeds 105%, the maturity yield will be the minimum redemption price of 102.56%.

Knock Out Coupon: the additional agreed interest paid when the knock out condition is triggered; this product has a rate of 0%.

Earnings Model: On any observation day, determine possible earnings based on the closing price of the linked symbol.

Scenario One: Triggering the Knock-out Boundary

On any observation day, if the closing price of HKEX touches the knockout boundary of 105%, the maturity yield will be calculated based on the minimum redemption price.

The yield at maturity = Principal * (Minimum redemption price + Knockout coupon rate) = Principal * 102.56%, which means the actual yield rate is 2.56%, corresponding to the annualized yield rate = 2.56% / 9 * 12 = 3.41%.

Scenario Two: The Knock-out Boundary is Not Triggered and the Symbol's End Price > Start Price

On any observation day, if the closing price of HKEX does not reach the knockout price and the end price is greater than the initial price, the maturity yield will fluctuate between 2.56% and 7.56%.

The yield at maturity = Principal * (Minimum redemption price + End price / Initial price - 100%), when the end price exactly equals the knockout limit, the yield rate at maturity is at its maximum.

Maturity yield = Principal * (Minimum redemption price + Knockout boundary - 100%) = Principal * 107.56%, meaning the actual yield is 7.56%, corresponding annualized yield is 7.56%/9*12=10.08%

Scenario 3: No knock-out boundary triggered, and the symbol's end price < initial price.

On any observation date, if the closing price of HKEX does not reach the knock-out threshold and is below the initial price, the maturity return will be calculated directly based on the lowest redemption price.

Maturity yield = Principal * (Minimum redemption price + Knockout coupon rate) = Principal * 102.56%, meaning the actual yield is 2.56%, corresponding annualized yield = 2.56%/9*12=3.41%

Refer to the illustration below to understand the operation mode of Call Shark Fin easily. mooers who still have questions can leave a message in the comment section.

2. Binary Structured Notes

Binary structured notes also belong to capital-protected structured products. Depending on the performance of the underlying assets, two different income results will be obtained. This 'either-or' income structure reflects the 'binary characteristic', hence it is called binary structured notes. The most common type is the bullish binary (Potential Bullish Coupon Enhancement ELI).

(1) Operation principle: Similar to the shark fin structure, it is divided into 'capital protection' and 'floating income' parts. However, the binary structure is simpler, with only a maximum return and a minimum return.

(2) Investment scenario: Suitable for a moderately rising market, suitable for conservative investors, hedging against the target's downside risk.

(3) Product design: Using bullish binary structure as an example.

Linked symbol: linked to Huaxia Hang Seng Biotechnology.

Minimum redemption price: 100%, meaning that at maturity, investors can at least get back 100% of their principal.

Strike price: set at 103% of the initial price, serving as the reference price benchmark for the symbol tied to the product. When Huaxia Hang Seng Biotechnology reaches, exceeds, or falls below the strike price on the expiration date, the corresponding yield will be triggered.

Other information: Duration is 6 months, currency for Trade is USD, principal protection rate is 100%.

Yield model: At expiration, the yield is determined based on the expiration stock price compared to the strike price (with this product's strike price equal to the initial stock price).

Scenario 1: Expiration price > strike price

The yield at maturity = principal * (minimum redemption price + maximum coupon) = principal * 103.4%, which means the actual yield is 3.41%, corresponding to an annualized yield of = 3.41%/6*12 = 6.82%.

Scenario 2: Expiration price = strike price

The yield at maturity = principal * (minimum redemption price + maximum coupon) = principal * 103.4%, which means the actual yield is 3.41%, corresponding to an annualized yield of = 3.41%/6*12 = 6.82%.

Scenario 3: Expiration price < strike price

Maturity yield = Principal * (Minimum redemption price + Minimum coupon rate) = Principal * 100.5%, which means the actual yield is 0.5%, corresponding to an annualized yield of = 0.5%/6*12 = 1%.

Five, the advantages and risks of structured products

Structured products have the feature of 'both offensive and defensive', and their advantages are quite obvious.

(1) Potential yield enhancement: Structured products can be linked to different types of Assets, providing the opportunity to achieve higher returns. Especially in volatile market situations, there is concern about entering the market recklessly and facing losses, while also worrying about missing out on opportunities by staying on the sidelines. If investing in capital-protected structured products, one can preserve the principal while also having the chance to gain risk-adjusted returns.

(2) Risk layering: Capital-protected products are suitable for conservative investors, while non-capital-protected options are suitable for those with a higher risk tolerance.

(3) Customized design: Various customizable options, including investment allocation, linked assets, investment currencies, and duration, can be adjusted flexibly to meet investor needs in different market conditions, allowing for the adjustment of capital protection ratios, yield formulas, and linked symbols.

However, at the same time, due to the design of the underlying products, structured products also carry corresponding risks.

(1) Market risk: The derivatives may be affected by price fluctuations of the underlying assets, with non-capital-protected types potentially losing principal.

(2) Liquidity risk: Structured products are rarely traded after issuance and generally have fixed investment periods. Early redemption may face discounts, making them less suitable for investors with short-term liquidity needs.

(3) Credit risk: Although the issuers of structured products are usually high-rated institutions, there is still a risk of financial distress or debt default, which could expose investors to credit risk.

(4) Exchange rate risk: Foreign currency-denominated notes are subject to exchange rate fluctuations.

Six, how to invest.

Can ordinary investors participate?

Generally, structured products are limited to participation by professional investors (individual professional investors: those who have an investment portfolio of no less than HKD 8 million or equivalent foreign currency in the last 12 months), and the very high subscription threshold has discouraged many mooers.

However, recently Futubull has also launched retail structured products, with a general subscription threshold of HKD 0.1 million or USD 0.015 million, allowing non-PI investors to participate smoothly!

For example, the shark fin structure and binary structure products mentioned above can be traded on Futubull, and the following operational guidelines can be referenced.

2. Operation guide.

Interested mooers can open the Futubull APP, select "Discover" - "Wealth Management" - "Structured Products", then choose the corresponding product to learn more details and participate in the subscription.

Additionally, you can click the image below to go directly >>Structured Products Introduction PageIf there are any other questions, everyone is welcome to leave a message in the course comment section.

*The highest annualized return of 8% (actual return of 4% comes from products with a six-month term) refers to the highest annualized return among the structured products provided on the Futu platform, with data as of May 22, 2025. The return data is for reference only, and past data does not predict future returns.

This content does not constitute any offer, solicitation, suggestion, opinion, or guarantee regarding any securities, financial products, or instruments. The issuer of this content is Futu Securities International (Hong Kong) Limited or its group companies, and the page is prepared and published by Futu Securities. The content has not been reviewed by the Hong Kong Securities and Futures Commission. Investing in structured investment products is not equivalent to investing in their underlying assets. Investors must bear the credit risk and bankruptcy risk of the issuer, guarantor, and/or other identified counterparties (as the case may be). Investors should also note that the issuer can terminate the investment early. Investment involves risks, and investors should act prudently regarding the product and be fully aware that they may lose all invested amounts. Before making any investment decisions, investors should carefully read and understand the sales documents and terms and conditions of the relevant investment products (including the risk disclosures contained therein) and should not make decisions to invest in structured investment products solely based on this content; appropriate professional advice should be sought if necessary.