Rising Popularity of Structured Products in Canada

Structured products are increasingly gaining traction in the Canadian market, providing investors with a unique combination of market participation and capital protection. While Guaranteed Investment Certificates (GICs), market-linked deposits, and Principal Protected Notes (PPNs) have seen year-over-year growth of 30% and 27%, respectively, the market is experiencing a significant shift towards Principal at Risk Notes (PRNs). PRNs have surged with an impressive 90% year-over-year growth, driven by investors' pursuit of higher returns.

Performance Breakdown (2021-2024)

Over the past four years, structured products in Canada have delivered compelling returns, particularly through Principal at Risk Notes (PRNs), which have consistently outperformed Principal Protected Notes (PPNs). The average performance from 2021 to 2024 shows that PRNs have shown robust returns, averaging between 8.02% and 9.08% over this period. Notably, PRNs peaked at a 9.08% return in 2023, reflecting their ability to capitalize on favorable market conditions, albeit with a higher risk profile. In contrast, PPNs have offered more conservative returns, providing stability and protection against market downturns. The returns for PPNs ranged from a low of 2.33% in 2022 to a higher return of 5.25% in 2024, demonstrating their role as a safer investment choice.

When comparing these structured products to other benchmarks, Canada Government Bonds (Over 10 Years) have provided an annualized return of 2.2% over the last five years, highlighting their role as a low-risk investment. However, these returns are significantly lower compared to structured products, particularly PRNs. On the other hand, the S&P/TSX Composite Total Return Index (TRI), a benchmark for Canadian equities, has delivered an impressive 11.1% annualized return over the past five years. While this outpaces the average returns of both PRNs and PPNs, the higher risk and volatility associated with equities make structured products a valuable alternative for more cautious investors.

In conclusion, structured products, especially Principal at Risk Notes, have proven to be a strong investment vehicle in Canada, consistently delivering higher returns compared to traditional fixed-income assets like government bonds. Although they generally offer lower returns than equities as represented by the S&P/TSX Composite TRI, they strike a balance between growth potential and risk management, making them an appealing option for investors looking to diversify their portfolios while managing downside risk.

Several key trends define the structured products landscape in Canada:

1. Shift Towards Income Products: 2024 saw a significant shift towards income-based structured products. After two years of focus on capital protection, income products such as coupon autocall and fixed coupon notes have become more prevalent. Coupon autocall products, for instance, saw their market share rise from 21.68% in 2023 to 28.06% in 2024.

2. Increased Diversification: Structured products have also become more diversified, with 80% of the underlying assets now tied to Canadian stocks or indices. However, exposure to global indices, particularly from the US, continues to play an important role in product performance.

3. Performance of Asset Classes: The Solactive Canada Bank 40 Index remains a major benchmark for structured products in Canada, although its share of exposure dropped from 16.33% in 2023 to 7.66% in 2024, suggesting a gradual shift towards other asset classes such as telecommunications and utilities.

Outlook

In 2024, structured products are expected to maintain their appeal, especially for investors looking for downside protection and market participation. However, investors need to carefully consider the trade-off between higher returns and risk. Principal at risk notes will likely continue to dominate due to their higher return potential, but principal protected notes may regain popularity with their conservative appeal as market conditions evolve.

In conclusion, structured products in Canada are evolving to meet investor demands for diversified exposure, better returns, and innovative protection features. With performance varying across different product types, investors must assess their risk tolerance and market outlook when choosing between principal at risk and principal protected products.