Structured notes can seem like an investor’s dream – enhanced returns, downside protection, or both – crafted through sophisticated derivative strategies. But how do they actually work, and where do the risks and trade-offs lie?

At Arta, we believe structured notes can be a powerful tool in many investors’ portfolios, when they're designed properly. Here’s what you should know to evaluate structured notes – for both fit and quality.

How structured notes can offer enhanced terms

Structured notes go beyond traditional stocks and bonds, using derivatives (e.g. options and futures) to build payoff structures that can enhance potential returns or protect capital. Skilled structuring teams can capitalize on market dynamics, like volatility and correlation, to design compelling terms, and then have issuing banks “bid” against each other to secure the best pricing.

The fixed investment term (typically months to a few years) may also earn investors an “illiquidity premium” – a return boost for committing capital.

Importantly, every note involves trade-offs. If the risks aren’t clear or the structure feels opaque, it’s a signal to avoid it.

How complexity is managed for the investor

While structured notes are built using sophisticated financial strategies, that complexity is under the hood – not something investors need to navigate directly. The real litmus test is the transparency of return outcomes: if it’s not clear, then it’s likely not a good fit. At Arta, we focus on breaking down the payoff terms clearly and avoiding unnecessary complexity so investors can understand how it works and what type of investor it’s designed for.

Not all structures are created equal

Structured products can vary in quality – some may be poorly timed, poorly structured, or poorly aligned. For example, many “calendar” structures are offered year-round, even when market conditions are not favorable for them. Additionally, some banks or advisors could be motivated by hefty commissions. 

Arta avoids these pitfalls by:

• Structuring notes in-house based on prevailing market conditions

• Customizing payoff structures to meet specific investor needs

• Ensuring aligned incentives through a simple, transparent fee model

The role of the issuing bank

Structured notes offered through Arta are issued by top-tier banks like JP Morgan and UBS. When you invest, you’re essentially buying a senior bond of the issuing bank – not Arta. That means the investment carries credit risk. To mitigate this, Arta only partners with major global financial institutions that have strong credit ratings.

How issuers make their profit

Banks bake their margins into the structure’s terms – typically through conservative assumptions or small spreads built into their pricing models. Each issuer runs its own models, which may vary in aggressiveness, resulting in a range of offers.

At Arta, we level the playing field by running a competitive bidding process across top-tier banks. This forces issuers to sharpen their pencils, helping ensure tighter pricing and allowing investors to capture more value.

What assets you actually own

From the investor’s perspective, a structured note is a corporate bond – or debt obligation – issued by a bank. That’s the actual asset you hold: a promise from the bank to deliver a specific payoff at maturity.

Under the hood, the bank uses derivatives linked to reference assets like stocks and indexes to hedge their risk. Even if this positioning does not perform as expected and the bank incurs losses, it remains contractually obligated to honor the note’s terms. The investor bears no trading risk – only the credit risk of the issuer.

Key risks to consider

Every investment carries risk – structured notes are no exception. Here are the primary ones to consider:

• Credit Risk: Structured notes are backed by the issuing bank, so your investment depends on that institution’s creditworthiness. If the bank defaults, your capital could be at risk. Arta itself bears no credit risk.

• Liquidity Risk: Structured notes are intended to be held to maturity. Exiting early can result in losses, even for principal-protected structures.

• Market Risk: Returns are linked to the performance of reference assets, generally stocks or indexes. Unless principal protection is a feature of the structure, your initial investment may be at risk if market conditions move unfavorably.

• Callability / Reinvestment Risk: If a structured note has a call feature (meaning it can terminate early), you face uncertainty around when your investment will actually mature. There’s no guarantee that you’ll be able to reinvest in a similar product with comparable terms.

What are the trade-offs

Structured notes come with a few trade-offs. They don’t pay out dividends from reference stocks or indexes, which can be a downside for income-focused investors. Instead, the economic value of any dividends is built into the pricing, which can help enhance the return profile. 

Additionally, tax treatment can be more complex than traditional investments. While some structures are taxable as long-term capital gains, others can be treated as short-term capital gains or ordinary income. 

That said, for the right investor, these trade-offs can be outweighed by the opportunity for enhanced returns, defined outcomes, and tailored risk exposure not easily achieved through traditional investments.

Who should consider structured notes

Structured notes can be a valuable addition to a diversified portfolio – and they’re no longer reserved for institutions or ultra-high-net-worth investors. They may be a strong fit for:

• Long-term investors hesitant to enter the market at current index levels but still seeking exposure

• Income-focused investors looking for alternatives to traditional yield strategies like bonds or dividend stocks

• High-net-worth individuals seeking differentiated return streams or customized exposures to complement core holdings

Arta uses suitability screening to ensure that investments align with investor goals, risk tolerance, and investment horizon. If you have a financial advisor, you can discuss your goals with them to determine if structured notes align with your investment strategy.

The bottom line

Structured notes are not a silver bullet, but for the right investor, they can be a powerful tool – offering asymmetric return potential, built-in protection, and strategic diversification. At Arta, we focus on transparency, customization, and value, helping investors cut through the noise and access high-quality structures that align with their objectives.

If you're ready to explore these products with confidence, Arta offers a modern platform to directly access structured notes designed for today’s sophisticated investor.