What are structured products and what are some examples?
Structured products are investments that combine safer, fixed-income elements with growth-oriented components within a single product. Think of them like a customized meal at a restaurant, where you choose different ingredients according to your tastes and risk tolerance. In Dubai’s dynamic financial market, these products allow you to benefit from stock market gains while protecting all or part of your initial investment. Typically created by banks, they are designed for a fixed term, usually between two and five years.
To better understand how structured products fit into long-term financial planning, many investors seek advice from independent consulting firms such as Hexagon GroupThese products prioritize transparency and suitability to individual investment goals. This article explains how they work, provides concrete examples, and helps you determine if they align with your financial objectives.
How do structured products work?
A structured product is primarily an investment that combines two key elements: protection and a growth engine. It allows you to invest in markets such as stocks or commodities without risking your entire capital.
Imagine you have AED 100,000 to invest. You could buy shares directly, which carries significant risk, or put the entire sum into a savings account, which offers a very low return. A structured product represents an intermediate solution.
Here’s how it works in simple terms:
- The section relating to security:It’s like a secure savings account. A large portion of your money is invested in safe investments, such as high-quality bonds. This portion grows slowly but surely, with the goal of returning your initial capital at maturity.
- The growth section:It’s like a calculated bet on the market. The rest of your money is used to buy options linked to stocks, gold, or stock indices. If the market performs well, this part generates your profits. If the market falls, your losses are generally limited, and the safety mechanism allows you to recover your initial capital.
At the end of the investment period, you will receive a payment calculated according to a clear formula defined during your initial purchase of the product. No surprises: the rules are established from the outset.
Why are they popular in Dubai?
Dubai attracts investors from around the world seeking growth opportunities but keen to manage their risks. Structured products perfectly meet this need. The UAE’s financial environment further enhances its appeal.
The absence of income tax in the United Arab Emirates makes investment returns more attractive. Dubai’s status as a global financial center allows its residents access to products linked to markets worldwide, from US stocks and Asian indices to European companies. Many expatriates in Dubai have savings they wish to grow before retirement or moving abroad. Structured products offer fixed maturity dates, compatible with these important life plans.
| Investor needs in Dubai | How structured products help |
| Capital preservation | Built-in protection devices can safeguard your initial investment. |
| Tax optimization | The gains are not subject to personal income tax in the United Arab Emirates. |
| Access to the global market | The products can be linked to a wide range of international indices and assets. |
| Clear time horizon | Fixed deadlines make financial planning easier. |
| Exchange rate options | Often available in major currencies such as USD, EUR and AED. |
Explanation of the different types of structured products
Structured products come in several variations, each designed to achieve a different financial objective. Here are the main ones, explained simply.
Capital-protected products
With these products, your initial investment is guaranteed to be repaid in full or in part at maturity. While the potential return may be lower than with other investments, you benefit from greater peace of mind. This type of investment is ideal for cautious investors who prioritize security.
Performance-enhancing products
These products require taking on more risk in order to achieve higher returns. Your capital is not fully protected, and you could suffer losses if the market moves against you. They are best suited to investors who accept the risk of losses in exchange for higher earning potential.
Participation products
Participation products expose you more to market fluctuations. For example, if the market to which they are linked rises by 10%, your investment could generate a 15% return. However, losses can also be amplified. This type of product is best suited to confident investors who have a strong opinion on market developments.
Products with automatic recall
These popular products can mature early if certain predefined conditions are met. If the underlying asset performs well on a specific observation date, the product is automatically redeemed, returning your initial investment plus a fixed payment. They are very popular with Dubai investors seeking regular income.
Practical examples of structured products
Let’s look at some examples to see how these products work in practice. These are typical structures offered to investors in Dubai.
Example 1: Protected bond on the S&P 500
- Investment:100,000 AED for five years.
- How it works:Your capital is 100% protected. You benefit from 80% of the S&P 500’s growth.
- Result 1:If the US stock market rises by 30%, you gain 24% (80% of the 30% gain).
- Result 2:If the market falls by 20%, you recover your entire investment of 100,000 AED.
- Costumes:An investor who wants to gain exposure to the US market without risking their savings.
Example 2: Automatic reminder note on technology stocks
- Investment:$50,000 USD for three years.
- How it works:Every six months, the product checks whether the price of a specific technology stock is higher than its initial level.
- Result 1:If so, the product ends and you get your money back plus an annual return of 8%.
- Result 2:If the share price falls considerably at maturity, you risk losing part of your capital.
- Costumes:An investor seeking regular income opportunities and having a higher risk tolerance.
Example 3: Gold-linked certificate
- Investment:200,000 AED for two years.
- How it works:Your capital is 90% protected. You receive 100% of any increase in the price of gold.
- Result 1:If the price of gold increases, you receive the entire profit.
- Result 2:Your maximum loss is limited to 10% of your initial investment.
- Costumes:An investor who is optimistic about gold, but who wants to protect against the risks of a decline.
Example 4: Reverse convertible shares in Dubai
- Investment:75,000 AED for one year.
- How it works:You receive a guaranteed payment in the form of a 9% coupon.
- Result 1:If the price of the underlying stock remains above a certain threshold, you get your investment back.
- Result 2:If the share price falls below the set threshold, you will receive shares instead of a cash payment. Therefore, you could end up with shares worth less than your initial investment.
- Costumes:An income-oriented investor who would have no objection to owning the underlying stock.
A professional advisor atHexagone Groupiescan help you identify the structures best suited to your objectives. Their independent consultative approach ensures that recommendations are based on the client’s goals and not on product commissions.
Advantages and risks
Every investment has two sides. Here is a balanced overview of structured products.
Benefits:
- You know the potential results before you invest.
- Protection mechanisms can limit your losses in the event of a market downturn.
- They offer access to global markets and assets from Dubai.
- They can be customized to match your specific financial goals.
- The potential returns are often higher than those of traditional bank deposits.
Risks:
- Credit risk:The bank or financial institution that issues the product could go bankrupt.
- Liquidity risk:It is often difficult to sell a product before its expiry date.
- Complexity:These terms can be complex and obscure important details.
- Capped earnings:Capital-protected products generally cap your maximum potential profit.
- Exchange rate risk:Exchange rate fluctuations may affect your returns if the product is denominated in a different currency.
Before investing, it is essential to carefully read the product documentation. Ask your advisor to explain what happens in different scenarios: rising, stagnant, and falling markets.
Are structured products right for you?
Structured products are not suitable for everyone. They are better suited to certain types of investors.
They might be suitable if:
- You have savings that you won’t need for the next few years.
- You want visibility in the market, but with certain security measures.
- You are willing to read and understand the product’s terms of use.
- You already own other investments and are looking for diversification.
- You can keep this investment until its maturity date.
They are probably not ideal if:
- You may need to get your money back at any time.
- You do not fully understand how the product works.
- You prefer simple and transparent investments such as stocks or funds.
- You cannot afford to risk part of your capital.
- You want total and direct control over your investments.
In Dubai’s diverse financial landscape, structured products can be invaluable when properly understood and used. The key is to tailor the product to your specific needs. The Hexagone Group team prioritizes education before any investment, helping clients understand clearly and simply what they are buying. This transparent approach protects investors from unsuitable products and fosters lasting trust.
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