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.

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.

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.