Principal Protected Note (PPN) Thoughts?

[ExtinctBird]

I have been reading recently about PPNs, and I was wondering if folks here have used these in their retirement portfolios. PPNs are sort of an individual bond that effectively pays a rate based on an index (or combination of indexes) growth over a fixed period. The index can be US or foreign stock indexes, currencies, commodities, etc.

The interesting thing is that you can get a PPN that, for example, pays 115% of the change in market indexes over a 4 or 5 year period with no real risk to your investment. This seems to have the benefits of a low (i.e. zero!) expense ratio index fund, but with no risk to your principal and even better returns. The only downside would be that your money is pretty much locked into this PPN until maturity. This seems OK though, when most would say that the stock portion of your retirement investments are for the long term anyway.

Am I missing something about these that make them too good to be true?

 

[Olav23]

There have been previous posts on this, I will dig around.

But as I recall, the devil is in the details. You lose all of the returns generated by dividends, as well as the possibility of strange methods of computing the returns by the creator of the note. You could create a very similar instrument by buying a bond and a LEAP call option on the index.

 

[mathjak107]

depends what the deal is, i myself am going to use both an index linked annuity with principal protection and a guaranteed floor fixed income annuity to beef up my cash bucket. the guaranteed floor annuity has the rate readjusted yearly so if rates rise you are covered. the index linked should do well if rates fall as stocks usually do well in all but a recession.

the idea is not to compare this to a equity investment , as the expenses and loss of dividends make it suck , but use it as a kicker for your money markets and cd's.

it should out perform them while beating them by a point or so with hardly any risk.

 

[brewer12345]

There is an expense ratio baked into the PPNs, you just can't easily see it in most cases.

If you want to fool with these things, do NOT buy them at issue. Buy them on the secondary market where they trade like stocks. IIRC, the American Stock Exchange lists a lot of these things, and if you poke around on their site under "structured products" you can find notes indexed to almost anything. But carefully read the fine print before you buy.