Growth vs Income Notes: What’s the Difference?

October 6, 20224 min read
Growth vs Income Notes: What’s the Difference?
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Key Takeaways:

  • Structured notes are hybrid securities that act like something in between debt and equity. Income and growth notes are types of structured notes that together make up a majority of the structured note market. 
  • Unlike income notes, growth notes allow for investors to participate in the upside performance of their underlying asset(s) while potentially offering limited downside exposure.
  • Yieldstreet is offering a diversified portfolio of income structured notes. With public market volatility at high levels, the portfolio will seek to mitigate some of the downside risks associated with owning stocks.

Structured notes are designed to offer a level of protection on the downside and are tied to the performance of an underlying stock.

Structured notes are hybrid securities that act like something in between debt and equity. They’re often issued by leading investment banks like Goldman Sachs or Morgan Stanley, who create a note and then build option positions to represent the underlying income. Income notes, a type of structured note for example, pay a fixed coupon payment on a quarterly basis, similar to a bond. These fixed payments make up as much as 80% of the investment. 

Meanwhile, growth notes seek to generate one payment at maturity, which depends on the potential appreciation of the underlying asset, most often stocks. 

Structured notes, whether they’re growth notes or income notes, primarily function as a contract. In exchange for their initial investment, the buyer receives downside protection, payout upon maturity (subject to certain criteria being met) and in the case of income notes, fixed coupon payments. While both income and growth notes offer a level of downside protection, their key difference lies in their payout structure. Income notes seek to pay a fixed quarterly coupon payment that comes at the expense of upside appreciation. Growth notes on the other hand, pay one coupon payment at maturity that’s based on the potential upside appreciation of the underlying stock, which comes at the expense of consistent coupon payments.  

Growth notes allow for investors to participate in the upside performance of their underlying asset(s). 

Whereas income notes are primarily focused on collecting coupon payments, growth notes allow for investors to participate in the upside performance of their underlying asset(s), which can at times be greater than 100%. A specific growth note may also be tied to any positive performance of an asset or limited to a range of positive performances from a basket of assets.  

As with income notes, investors can also potentially limit downside exposure with growth notes. 

The tradeoff with growth notes is typically the balance between upside potential and downside exposure. Downside exposure can be limited through either soft or hard protection, which is dependent on the market environment and client risk preferences.

Income notes generally have hard protection, meaning a more conservative level of downside protection while growth notes generally have soft protection, which is slightly less downside protection. The trade off for growth notes is a classic example of higher risk, higher reward. With less protection on the downside, growth notes are able to provide investors the opportunity to participate in potential upside appreciation.

Both growth notes and income notes can be used to complement core portfolio holdings and as tactical strategies to optimize return.

Similar to having house or car insurance, a growth note can help mitigate some of the downside risks associated with traditional markets. For this reason, they’re often used to complement core portfolio holdings that may be made up of stocks. At the same time, they can also be used for tactical purposes (for instance, participating in the worst-of upside between two similar stocks), or for tactical tilts in portfolios. If there are portfolio holdings (stocks, ETFs, etc.) that have recently declined but fundamentally are still intact, growth notes can provide an opportunity to participate in upside without having to time the inflection/rebound point of the underlying.

If there are stocks that an investor has a large exposure to, or stocks that are higher in volatility, an investor can use a growth note as a form of downside protection with some upside potential.

Yieldstreet and Structured Notes

Yieldstreet offers a variety of structured notes. Currently, we’re offering a diversified portfolio of income structured notes. With public market volatility at high levels, this portfolio seeks to mitigate some of the downside risks associated with owning stocks with the goal of generating investors regular income payments over the life of the investment. 

We believe our 10 alternative asset classes, track record across 470+ investments, third party reviews, and history of innovation makes Yieldstreet “The leading platform for private market investing,” as compared to other private market investment platforms.

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