Wednesday, July 9, 2008
"The use of structured products has grown rapidly, with their total value more than quadrupling, from $28 billion in 2003, to $114 billion in 2007. ... In May, 2007, there were 437 structured products aimed at individual investors, valued at $2.4 billion; in May, 2008, there were 634, with a total value of $4.2 billion, according to data from Structured Retail Products. ... The notes can be designed for almost any goal, from protecting retirement dollars to aiming aggressively at high returns. ... Principal protection notes [PPN], geared to insure against market losses, are popular now. ... The notes come with undeniable hazards. At the heart of what you're buying is a promise to pay by the issuer of the note--and such promises are only as good as the institutions that offer them. ... The risk of another blowup, however slight, has some advisers leery of buying in. 'If a bank collapses, our clients become creditors. We don't want to expose them to that,' says Michael C. Walther III, a wealth manager with Balasa Dinverno Foltz in Itsaca, Ill. ... The secondary market is thin to nonexistent, and if an issuer agrees to buy the notes back, expect a big haircut. They can also be expensive. Prepackaged notes--those that banks like JPMorgan Chase and Barclays Capital usually offer in units of $1,000--typically have commissions of 2% to 3%. To cut costs, some independent advisers pool clients assets to create a firm-specific product with commisssions as low as .5%. ... With a [PPN], if the stock market drops, your money, which has been invested in a zero-coupon Treasury or corporate bond, is protected (table). ... But if the market rises, you can share in the rise, up to a certain point", Ben Levisohn (BL) at Businessweek, 30 June 2008.
More bank garbage. I wouldn't touch these things. An individual can likely create most PPNs by himself and save the fees. Look at a PPN. Suppose modifying BL's example, you put $840 in a five-year zero coupon Treasury and $160 in Vanguard's S&P 500 index fund. You get the same result as owning the PPN, without paying commssions and not subjecting yourself to bank credit risk. Who needs this junk?