About Principal Protected Notes
PPNs vs. Other Popular Investments
Investors have access to a broad range of options, from mutual funds that invest in virtually any asset class to traditional fixed income investments, and alternative investments such as hedge funds. The following table outlines how Principal Protected Notes compare – in general terms – with other categories of investments. The table is not exhaustive, and every investment must be looked at individually, but the table and following paragraphs help to outline the major points of difference between Notes and other investments.
PPNs versus Other Investments
| PPNs | Mutual Funds |
Seg. Funds |
Bonds | GICs | Hedge Funds |
|
| Principal Protection |
100% | No | 75- 100% |
100% | 100% | No |
| Leveraged Returns |
Certain notes |
No | No | No | No | Certain funds |
| RoC Income |
Certain notes |
T-class funds |
No | No | No | Yes |
| RSP Eligible | Yes | Yes | Yes | Yes | Yes | Yes |
| Liquidity |
Daily/ Weekly |
Daily | Daily/ Weekly |
Daily | Low | Monthly/ Quarterly |
| Prof. Managed |
Certain notes |
Yes | Yes | No | No | Yes |
| Average Annual Fee |
Up to 3.25% |
Up to 3% |
Up to 4% |
None | None | 2-20% Fee |
| Term to Maturity |
3-8 yrs |
N/A | 10 yrs |
Up to 30 yrs |
Up to 5 yrs |
N/A |
| Minimum Investment |
From $2,000 |
From $500 |
From $500 |
From $5,000 |
From $500 |
Minimum $150,000 |
Notes vs. Mutual Funds
Like mutual funds, Notes can focus on any number of underlying asset classes – from international equities to Canadian income trusts. Like funds, Notes can be income- or growth-oriented, depending on the underlying investments. However, they differ in some important ways.
Funds invest directly in their respective asset classes, while Notes rely on derivative products to obtain exposure to the underlying investments. Unlike Notes, funds do not provide guarantees of principal repayment. Most funds are open-ended, while Notes have finite terms, at the end of which they guarantee to fully repay principal plus growth. Funds cannot utilize leverage and therefore cannot provide the enhanced returns available through some Notes.
Funds are typically more liquid than Notes, with Net Asset Values (NAVs) being calculated daily and redemptions possible on any market day. Since Notes must cover the cost of the principal guarantee, their fees are typically somewhat higher.
Notes vs. Segregated Funds
Segregated funds might be the closest comparative to Principal Protected Notes since both offer principal protection and exposure to a range of growth- or income-oriented investments. Segregated funds are typically offered by insurance companies and are, in fact, insurance contracts with death benefits.
Segregated funds do not always guarantee 100% of initial principal, and their annual fees tend to be somewhat higher than Notes. However, the death benefits can play an important role in estate planning and can – in certain circumstances – help these assets be considered creditor proof. Like mutual funds, segregated funds cannot utilize leverage and therefore cannot offer the enhanced returns that are available through some Notes.
Notes vs. Bonds and GICs
While Notes, bonds and GICs all offer 100% principal guarantees, the latter two are "fixed income" investments, promising specific interest rate payments. While bonds can generate capital gains (or losses) if traded prior to maturity, they do not provide exposure to growth-oriented asset classes as Notes do.
In contrast, the interest payments offered by Notes are not fixed, but vary with the performance of the underlying investments. This can result in significant out-performance by Notes in the correct circumstances, but it can also mean that investors receive back only their principal at maturity. Given the time value of money, receiving back only original principal after as long as eight years does translate into a loss in terms of purchasing power.
Notes vs. Hedge Funds
The term "hedge funds" covers a wide range of investment strategies, many of which – like Notes – rely on derivatives to obtain their objectives. However, while many hedge funds are defensive in nature, they do not provide a principal guarantee.
Numerous Notes provide exposure to hedge funds, which, because of hedge funds high minimum investment requirements, would normally be beyond the reach of most retail investors. By accessing hedge funds though a Note, investors benefit from the security of principal protection and, typically, diversification across a range of hedge strategies.
