Protection Barrier vs. Capital Protected, Which is Better?
It is not necessarily true that a capital protected structured note is better or safer than structured notes with protection barrier.
High risk high return, and VICE VERSA
A 100% capital protected note serves to secure at least the full amount of invested capital, regardless of the price movement on the final valuation day. This helps to lower the risk faced by investors, but remember the theory of low risk- low return? The return is usually compromised in a capital protected note, the common range is around 1.2%-1.5% P.A.
On the other hand, a protection barrier may not guarantee the investor to get back his full invested amount, but a lowered protection barrier is able to provide a good safety net to accommodate price movement which essentially enables the investor to get back the full amount of the invested capital.
For example, a lowered protection barrier of 70% means that there is a 30% allowance for price to fluctuate. As long as the underlying price of the worst performer on the final valuation day remains above 70% of its initial fixing, investors will be able to get back the full amount he/she has invested (not including any coupon payments if any, or any profit if the product price is above its initial buy-in- price).
In addition, Autocall feature is NOT applicable to a capital protected note so investors will have to hold on to the note until it matures. Allowing the note to have a chance of getting autocalled provides more flexibility for the investor in managing their finances. They have the chance to get back their capital plus any additional profit earned before for e.g. 6 years, and re-invest their money into another product. This also provides their financial advisor with another opportunity to earn a commission, hence it is a win-win situation.
As a comparison, here’s an example of NEBA’s index-based note with protection barrier:
And here’s an example of index-based, capital protected note: