A structured note is a debt obligation that tracks both an underlying debt obligation and a derivative (option) embedded within it.
Balcom's firm works with major banks to develop notes designed to cap the upside and protect the downside from modest declines. By creating an in-house structured note, the firm is able to allocate assets to it for both high-net-worth and mass-affluent clients. He estimates that more than one third of his clients' portfolios are invested in this strategy.
The notes are generally from one to three years in duration, and the firm offers a series of laddered maturities.
One advantage of this strategy is that it is allowed within an individual retirement account, Balcom said. Downsides include credit risk of the issuers and the lack of dividend income.
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No-load modified endowment contracts. "I have been using [these] the last few years as an alternative to cash," said Keith Singer, CFP and founder of Singer Wealth Management. "Client funds are safe and liquid and average about 5 [percent] to 6 percent tax-deferred, with no interest-rate risk."
A modified endowment contract is a "tax qualification of a life insurance policy where the policy has been funded with more money than allowed under federal laws," according to Investopedia.com.
"Historically used as a wealth-transfer tool, this new liquid version, introduced about three years ago, may be used as a proxy to cash or bonds," said Singer. "It is usually owned by people interested in tax-favored growth and tax-free death benefit or long-term care benefit."
The product provides certain minimum guarantees, he said, netting investors between 1 percent and 1.5 percent if the market goes down. If the market is up, it yields a yearly range of returns tied to the S&P 500 Index.