Structured Notes and Buffer funds are sleep-well-at-night products designed to protect investors from market drops. Brokers and nervous investors love them, despite their complexity and fees.
Talk to any financial advisor these days, and he or she is likely to have a strong opinion about something known as “structured notes.” These complex products are sold as the “have your cake and eat it” investments of the wealth management world. Their specialty is flexibility –some are geared toward growth and others toward income. Returns are generally capped and in all cases the goal is to limit downside risk. They are manufactured by big banks like JPMorgan using derivatives, and are often sold as “stock market-linked” with “sleep well at night” protection. They come with various maturities, typically ranging from six months to five years, provide principal protection and sometimes offer annual yields of 10% or more.
Up until the last few years, structured notes were mostly the domain of hedge funds and other sophisticated investors or ultra-wealthy clients. But thanks to clever engineering, the notes are now being offered by scores of brokers and sold in bite-sized $1000 increments. The current market volatility and uncertainty has caused them to surge in popularity. Last year the broker-sold U.S. structured notes market reached a record high of nearly $150 billion, up 46% from the previous year, according to London’s Deriva Intelligence. JPMorgan was the top issuer in 2024, followed closely by the likes of Citi, Goldman Sachs, Morgan Stanley and Barclays.
“I absolutely love structured notes,” says Ahn Tran, an independent advisor at $350 million (assets) SageMint Wealth in Irvine, California. Structured notes make up about 30% of the allocation in most of Tran’s client portfolios. “I’ve never had so many calls from advisors reaching out asking if we can talk to them about how we run our portfolios,” says Tran.
“Clients are using structured notes not because they’re ‘hot,’ but because they allow you to take more control of the outcome,” insists Michaelangelo Dooley, Structured Note Strategies Portfolio Manager at $30 billion investment advisory NewEdge. Dooley is referring to the fact that these securities can be tailor made to meet the demand created by specific market environments. A few years ago when rates were low, for example, stock market notes offering income of 10-12% were popular. “Each [note] is entirely different with the risk that it takes on. Even within the same category—like contingent yield notes—two products might have similar structures but vastly different outcomes based on the underlying assets.” One could be tied to the S&P 500, another to Tesla or Nvidia stock, Dooley notes, adding: “They are not comparable trades.”
Take Bank of Montreal’s freshly issued Senior Medium Term Notes, Series K, Market Linked Notes due April 2028. The notes, which are one of the first products to roll off of a $78 billion shelf registration, bear no interest and are designed to track the performance of the tech-heavy Nasdaq 100 Index, which is down 11% year to date. The maximum gain noteholders are entitled to is 22.8%. Thus, if in three years, when the notes are due, the Nasdaq100 is up 35% from its level on April 25, 2025, investors will only be entitled to $1,228.00 for each $1000 par amount note. However if tech stocks continue to fall and the Nasdaq 100 is down 35%, the BMO structured note holders get their original $1,000 returned.
Another type of structured note is known as a “buffered” note. These, which typically track an index like the S&P 500, allow for a cushion—say, 20% or 30%—against losses. If the asset declines 15%, the investor’s principal is preserved. If it drops 35%, the first 30% is protected and the investor takes only the final 5% loss.
Contingent income notes offer periodic income—say, 9% annually—as long as the underlying asset or index doesn’t fall below a preset barrier. They are often “autocallable,” meaning they redeem early if the reference asset hits a high price target price. If markets are stable or rising, this feature can allow for quick realization of gains and capital return. But when markets stay choppy—like they have been in 2025—the notes may linger to maturity, still paying income but testing investor patience.
Contingent barrier notes, meanwhile, act like a trapdoor. If the index stays above a set barrier—commonly 60-75% of its initial value—the investor gets their principal back, possibly with a coupon. But if the barrier is breached, protection vanishes, and the note’s return moves in tandem with the underlying asset, meaning that the client assumes a 1:1 loss.
According to Andrew Kuefler, SVP of Product Strategy at alternative investments marketplace iCapital, the current volatility has made these autocallable contingent income notes especially attractive. “When uncertainty spikes, these products offer yields in the 7–10% range with 30–45% downside protection,” he says. “Advisors are using them to harvest volatility and generate income without taking full equity risk.” Following market events like Trump’s tariff announcement, Kuefler noted quote requests surged by 140% week-over-week—clear evidence of rising advisor interest.
These novel securities are not without their costs. Bank of Montreal charges advisory firms a 2.5% commission for creating the notes. Then financial advisors likewise, get their cut from clients after that. Unlike ETFs of mutual funds, these notes also have limited liquidity and even under the best case scenario, an investor would likely do just as well by investing in a high yield corporate bond fund, which is inherently less risky and less complex. Vanguard’s High Yield Bond Fund, with its expense ratio of 0.22%, is currently yielding 7%, about the same annual return you would achieve under the best case scenario with the BMO’s new Nasdaq100-Linked structured notes.
Greenwich Connecticut’s AQR Research is a big critic of structured notes like BMO’s, as well as similarly structured funds and ETFs that are sold as “Defined Outcome” or “Buffer” Funds. In March, AQR issued research saying it would be smarter and cheaper for investors to simply their exposure from 100% stocks, to say 70% with 30% in Treasury bills, than to invest in one of these options-fueled funds. “These ‘buffer funds’ are a marketing success, a success for the managers selling them, and a failure for investors lured in by the overpromise of magical equity returns without equity risk and then overcharged for the pleasure,” writes Daniel Villalon, Global co-head of portfolio solutions at AQR.
Like their broker-sold cousins “buffer ETFs” have soared in popularity recently. According to Morningstar, assets have ballooned to $58 billion up from their inception in 2018. One of the most popular is Defined Wealth Shield ETF, from Wheaton, Illinois’ Innovator Funds. The $1.4 billion (assets) fund whose symbol BALT, stands for “bond alternative” and like other buffer ETFs, is designed to allow for some market gain participation but limit losses. BALT allows investors to participate in S&P 500 gains capped at 2.47% each quarter, but protects them from any losses up to 20% on the downside during the same quarter. During 2024’s roaring 23% run in the S&P 500, BALT owners would have earned just under 10%. Year-to-date, with the S&P down 9% BALT is off only 1%.
Critics of structured investment vehicles argue that the complexity masks inefficiencies and cost. They also warn that their perceived safety evaporates during black swan type economic events—like a global recession. Structured notes are unsecured obligations and are thus, only as sound as the financial institutions issuing them. During the financial crisis, investors lost nearly all of their principal in the more than $18 billion in structured notes issued by Lehman Brothers.
“Banks and advisors make a ton of money on them,” says one Morgan Stanley advisor who asked to remain anonymous. “But in worst-case scenarios like 2008, they were the worst thing to hold.
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