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Structured Products

Structured products offer investors the potential to earn returns tied to the performance of an index or basket of securities. Rates of return vary and are generally paid at maturity, along with the face amount of the investment, subject to the credit risk of the issuer.

Reasons to consider structured products

  • Market participation
  • Access to alternative asset classes
  • Intent to hold until maturity

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Structured products from Fidelity

Fidelity currently offers "new issue" structured products that are either:

  • Market-linked (e.g., equity or currency indexes) certificates of deposit, which carry FDIC insurance protection on the invested principal, subject to FDIC coverage limits ($250,000 per account owner per institution); or
  • Senior unsecured obligations of the issuer, which are not FDIC-insured.

As with any new issue offering, prospective investors should read the prospectus which provides greater detail on the offering and its structure. Customers may then submit indications of interest during an order period. At issuance, customers typically receive an allocation amount equal to the indication of interest that was submitted. However, submitting an indication of interest does not guarantee an allocation. If the offering is oversubscribed (more securities were requested than available for purchase), and you did not withdraw your order, you may receive only a portion of the securities you requested, or none at all. Further, if the offering is undersubscribed, the offering can be pulled.

Investments in structured products that are FDIC-insured involve the issuance of an underlying certificate of deposit, which is the sole obligation of the issuing bank. This underlying CD provides the FDIC protection on this investment. Non-FDIC-insured structured products have no CD issuance. With these investments, which are unsecured debt, customers are unsecured creditors of the issuer.

Components of Fidelity’s structured products

The structured products offered through Fidelity.com include the following components:

Payout profile

Fidelity currently offers only a point-to-point payout profile. A payout profile represents how a customer's cumulative return is measured. The return of the structured products available on Fidelity.com is measured based on two points: point A (initial or starting index level, which is typically the closing value of the index on the pricing date) and point B (final index level, which is typically the closing value of the index on a date specified in the offering document). The product will provide its investment return based on the following formula:

(final index level – starting index level)
starting index level

Certain structured products impose limits on return potential in the form of a "cap" or may limit your participation in the upside performance of the linked index or customized basket (see below).

Participation rate

The potential return to the investor depends in part on what is known as the participation rate. If the participation rate of the structured product is less than 100%, the investor will realize a return that is less than the return of the linked index or customized basket. For example, if the participation rate is 80%, the investor will receive only 80% of any positive return on the index or basket, assuming no other limits on return potential. The participation rate will vary by product, and factors such as index type, maturity, and caps affect the rate.

Cap

A cap represents a ceiling above which the investor does not participate in further upside gains of the linked index or basket. In other words, if the linked index or benchmark generates a return greater than the stated cap, investors will not receive any returns in excess of the capped return. For example, if a structured product allows for 100% participation in an index subject to a 50% cap, the investor cannot earn more than 50% on the investment even if the investment appreciates above that.

Costs and fees

Placement fees, structuring, development, and other costs will vary and may impact secondary market prices for structured products. Investors should consider these and any other costs and fees covered in the offering document prior to investing.

Taxes

Structured products may be considered contingent payment debt instruments for federal income tax purposes. This means you'll usually have to pay income taxes each year on imputed annual income even though you may not receive a cash payment until maturity. In addition, any gain realized upon the sale of these products may be treated as ordinary income. Please refer to the offering document for the specific tax treatment of a structured product and consult your tax advisor for more details.

Market participation

Investors participate only in the upside performance of the underlying index. Principal is not at risk from negative performance of the index, but is subject to issuer credit and default risk.

Access to alternative asset classes

Investors gain exposure to asset classes such as currencies and commodities that might otherwise be difficult to access.

Credit and default risk

Structured products are subject to the risk of default by the issuer. Therefore, the financial condition and creditworthiness of the issuer are important considerations when assessing the ability of the issuer to meet its obligations according to the terms of the structured product. In summary, if the issuer defaults or declares bankruptcy, the investor may lose all or some of the investment. In the case of FDIC-insured market-linked CDs, deposit amounts exceeding applicable FDIC coverage limits are subject to the credit risk of the issuing bank. Other limitations on FDIC coverage may apply. Structured products which are senior unsecured notes are not FDIC-insured. In the event of issuer default on a non-FDIC-insured product, repayment of principal would be subject to the issuer's restructuring and liquidation process and is in no way guaranteed.

Limited FDIC protection

For FDIC-insured market-linked CDs, FDIC coverage generally applies to the amount of invested principal only. Any appreciation relating to the linked index or benchmark is not FDIC-insured. If you hold more than the FDIC-insured limitations in deposits with the issuing bank, you will not receive the benefit of FDIC insurance for any balance in excess of FDIC limits. In this instance, amounts in excess of FDIC-insured limits are subject to the credit risk of the issuing bank.

Liquidity risk

Structured products are intended to be held until maturity. Due to a limited secondary market, it may not be possible to sell a structured product prior to maturity. Additionally, should a secondary market exist, investors who need to sell a structured product prior to maturity may be subject to a significant loss.

Market or opportunity risk

The potential return on structured products is subject to market volatility and the risks associated with the linked index or basket. The return of a structured product may be zero or less than what could have been earned on a traditional fixed income security.

Derivatives risk

The issuers of structured products may choose to hedge their obligations by entering into derivatives and/or trading in one or more instruments, such as options, swaps, or futures. The costs associated with such hedging activity could affect the market value of a structured product or the price at which the issuer may be willing to purchase a structured product in the secondary market.

Commodity price risk

If the investment benchmark is linked to one or more commodities, you may be subject to market volatility and risks relating to commodities. Trading in commodity futures contracts associated with an underlying commodity index is speculative and can be extremely volatile. The performance of the commodity index or basket of commodities may deviate significantly from the performance of the referenced commodity or commodities.

Currency and exchange rate risk

If the investment benchmark is linked to a foreign currency or currency basket, you may be subject to foreign currency risks. The value of foreign currencies can be highly volatile and may change based on various factors, which may include changes in national debt levels and trade deficits, domestic and foreign inflation rates, domestic and foreign interest rates, and global or regional political, regulatory, economic or financial events. Performance may deviate significantly from the performance of the referenced currencies or exchange rates.

The scenarios presented below are hypothetical. Actual investment performance may differ. In all cases, return of original investment principal is subject to the credit risk of the issuer or guarantor.

Scenario 1: The index rises

Assume return is tied to the performance of the S&P 500® Index. In this scenario, the index rose 50% over the life of the structured product; in other words, it was up 50% between purchase date and maturity. Further, assume an original investment of $1,000 and an 80% participation rate. Given these conditions, the return to the investor would be $400 ($1,000 × 50% × 80%). So at maturity, the customer would receive the amount of his or her original investment principal, plus the $400 index return amount, for a total of $1,400.

Scenario 2: The index falls

In this scenario, assume return is again tied to the performance of the S&P 500® Index, but in this case, the index falls 50% over the life of the structured product. The customer would not receive any additional returns under the participation rate; instead he or she would be paid according to the principal return at maturity percentage offered by the structured product. Assuming it was 100%, then regardless of how far the index fell, the customer would receive a full return (i.e., 100%) of his or her initial invested principal at the end of the term. In this example, the customer invested $1,000 and would receive it back at maturity.

Scenario 3: A capped return

In this final scenario, again assume return is tied to the performance of the S&P 500® Index. Assume again that the index rose 50% over the life of the structured product. Further, assume an original investment of $1,000 and an 80% participation rate. Finally, assume a cap of 35%. Given these conditions, the return to the investor would be the lesser of the participation amount of $400 ($1,000 × 50% × 80%) OR the cap amount of $350 ($1,000 × 35%). So in this scenario, the customer would receive the amount of his or her original investment principal, plus the $350 cap index return amount, for a total of $1,350.

These examples are for illustrative purposes only and are not intended to predict or project the performance of any investment or security. Taxes, inflation, fees and/or expenses were not taken into account. If they had been deducted, performance would have been lower. Past performance is not a guarantee of future results. Your performance will vary, and you may have a gain or loss if you sell prior to maturity. Before you start, you should review all of the assumptions for these hypothetical examples.

Type Index (underlying asset) Principal  return at maturity* Participation rate Cap percentage
Registered notes (unsecured debt)
Domestic Equity S&P 500 100% 100% 60%
International Equity Nikkei 225 100% 100% 65%
Commodity Dow Jones-UBS Commodity Index 100% 105% 65%
Currency BRIC Currency Basket (Brazil, Russia, India, China) 100% 125% 70%
FDIC-insured CD
Domestic Equity S&P 500 100% 90% 55%
Domestic Equity Russell 2000 100% 100% 60%
* Subject to issuer credit risk
S&P 500: S&P 500 Index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.
Minimum investments can be as low as $1,000.
The structured products offered by Fidelity are new issues; therefore, customers do not pay FBS a concession. Fidelity Brokerage Services and National Financial Services LLC receive a selling concession from the offering broker for their distribution of structured products. Other fees may apply which are disclosed in the offering document.
The structured products will be available on a regular basis. Investors are able to place orders online at Fidelity.com or through a representative. See current offerings.
Nikkei 225: Nikkei 225 Index is a market capitalization-weighted index of the 225 leading stocks traded on the Tokyo Stock Exchange.
Dow Jones: UBS Commodity Index Total Return is a price-weighted index that serves as a measure of the commodities market that comprises 19 commodity futures in 5 sectors with returns on cash collateral invested in U.S. Treasury bills.
BRIC Currency Basket: A customized basket composed of the following currencies representing the group of countries often referred to under the acronym “BRIC”: the Brazilian real, the Russian ruble, the Indian rupee and the Chinese yuan. The change in value of each basket currency is typically based on exchange rates relative to the U.S. dollar.
Russell 2000: Russell 2000 Index is a market capitalization–weighted index designed to measure the performance of the small-cap segment of the U.S. equity market.

Next steps

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certificate of deposit (CD)

a debt instrument issued by commercial banks or thrifts to raise funds for business activities or to retire other debt; Fidelity offers a type of certificate of deposit called a brokered CD

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creditor

an entity that extends credit to another entity by providing permission to borrow money; agreement generally includes the terms of the loan, such as interest rate, payment frequency, and date the principal the loan is due. In the context of bonds, an investor in bonds is described as a creditor of the entity that issued the bonds

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creditworthiness

measurement of the risk of default of an individual fixed-income security or the issuer of a fixed-income security; generally measured by one of the major ratings agencies

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debt obligation/principal

an interest-bearing promise, to pay a specified sum of money (the principal amount) on a specific date; bonds are a form of debt obligation; categories of bonds are: corporate, municipal, treasury, agency/GSE

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fixed income

a type of asset class in which the investments provide a return in two possible forms; coupon paying bonds have fixed periodic payments and a return of principal; zero coupon bonds are sold at a discount, do not pay a coupon, and have a return of principal plus all accumulated interest at maturity

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indication of interest

a specific type of order submitted to let Fidelity know that they want to become eligible to receive an allocation of a new issue

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issuer

a government, corporation, municipality, or agency that has issued a security (e.g., a bond) in order to raise capital or to repay other debt; the issuer goes to an underwriter to get their securities sold in the new issue market; for certificates of deposit (CDs), this is the bank that has issued the CD; in the case of fixed income securities, the issuer of the security is the primary determinant of the security's characteristics (e.g., coupon interest rate, maturity, call features, etc.)

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participation rate

the extent to which an investor will participate in the potential appreciation or depreciation of an underlying index or basket of securities; if the participation rate of the structured product is less than 100%, the investor will realize a return that is less than the return of the linked index

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prospectus

a legal document required by the Securities and Exchange Commission (SEC) that discloses an investment's objectives, past performance, and other information to parties considering investing in financial instruments such as stocks, bonds, mutual funds, etc.

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structured product

an investment vehicle derived from a single security, a basket of securities, an index, a commodity, a debt issuance and/or a foreign currency; risks include: issuer default, limited FDIC protection, liquidity risk, market risk, derivatives risk, commodity price risk, currency risk

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maturity, maturity date(s)

the date on which the principal amount of a fixed income security is scheduled to become due and payable, typically along with any final coupon payment. It is also a list of the maturity dates on which individual bonds issued as part of a new issue municipal bond offering will mature

More information

The Standard and Poor’s 500 Index (S&P 500) is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.
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