DEFINITION of 'Structured Investment Products (SIPS)'

Structured investment products or SIPS are types of investments that meet specific investor needs with a customized the product mix. SIPS often include the use of derivatives.

SIPS are distinct from a SIP or systematic investment plan, in which investors make regular, equal payments into a mutual fund, trading account or retirement account in order to benefit from the long-term advantages of dollar-cost averaging.

BREAKING DOWN 'Structured Investment Products (SIPS)'

A structured investment can vary in its scope and complexity, often depending on the risk tolerance of the investor. SIPS typically involve various exposures to fixed income markets and derivatives. A structured investment often starts with a base of a traditional security, such as a conventional investment grade bond, and replaces the usual payment features (e.g., periodic coupons and final principal) with non-traditional payoffs, derived not from the issuer's own cash flow, but from the performance of one or more underlying assets.

The Securities and Exchange Commission (SEC) is focusing on structured notes in 2018, due to widespread criticism over their excessive fees and lack of transparency. As an example, in June 2018, Wells Fargo Advisors LLC agreed to pay $4.1 million to settle SEC charges relating to multiple trades of “improved” structured notes that were more up-to-date with the current market price and appeared to pose less risk to investors. Constant changes in the creation of these securities can lead to confusion and at times deception among traders and their clients.

SIPS and the Rainbow Note

Structured products attract many retail investors with their ability to customize a variety of assumptions within a single instrument. For example, a rainbow note offers exposure to more than one underlying asset. A rainbow note might derive performance value from three relatively low-correlated assets, like the Russell 3000 Index of U.S. stocks, the MSCI Pacific Ex-Japan Index, and the Dow-AIG commodity futures index. In addition, attaching a lookback feature to this structured product could further lower volatility by "smoothing" returns over time.

In a lookback instrument, the value of the underlying asset is based not on its final value at expiration, but on an optimal value taken over the note's term (e.g., monthly or quarterly). In the options world, this also coincides with an Asian option (to distinguish the instrument from the European or American option). Combining these types of features can provide even more attractive diversification properties.

RELATED TERMS
  1. Systematic Investment Plan - SIP

    Systematic investment plans (SIP) involve putting money into ...
  2. Structured Note

    A structured note is a debt obligation that contains an embedded ...
  3. Flash Freeze

    The Flash Freeze was a sudden and unexpected Nasdaq halt to trading ...
  4. Structured Funds

    Structured funds are managed portfolios that combine equity and ...
  5. Structured Finance

    Structured finance is a highly involved financial instrument ...
  6. Financial Structure

    Financial structure refers to the specific mixture of long-term ...
Related Articles
  1. Managing Wealth

    4 Structured Product Types Wealthy Clients Love

    High-net-worth investors find structured products appealing for a variety of reasons. Here's a look at four types.
  2. Trading

    Derivatives 101

    Learn how to use derivatives to hedge, speculate or increase leverage in an investment portfolio.
  3. Financial Advisor

    A Fresh Look At The Financial Markets

    Different markets provide unique opportunities and risks for investors. Find out more here.
  4. Investing

    Complex Derivatives Made Simple

    Many ETFs hold derivatives. Here's how to be sure if you own a derivatives-based ETF.
  5. Investing

    These Financial Products Are Too Complex for Some

    Learn about some of the structured financial products you should be beware of, as they are so elaborate that investors are unable to assess costs and risk.
  6. Personal Finance

    4 Derivative Sales Career Paths

    Discover some sell-side career paths of derivatives markets that offer some unique opportunities for career seekers in this article.
  7. Investing

    The Debt Ratings Debate

    Lack of competition and potential conflicts of interest have called the value of these ratings into question.
  8. Trading

    An Overview Of Futures, Derivatives, and Liquidity

    Gain an understanding of futures and derivatives, and how these instruments are meant to mitigate market risk.
RELATED FAQS
  1. What is the difference between derivatives and options?

    A derivative is a financial contract that gets its value from an underlying asset. Options offer one type of common derivative. Read Answer >>
Trading Center