Structured products are designed to facilitate highly customized risk-return objectives. This is accomplished by taking a traditional security, such as a bond, and replacing its usual payment features (i.e. the periodic coupons and the final principal) with non-traditional payoffs derived from the performance of one or more underlying assets, yet not from the issuer's own cash flow.
Consequently, structured products are closely related to traditional models of option pricing, though they may also contain other derivative types such as swaps, forwards and futures, as well as embedded features such as leveraged upside participation or downside buffers.
Structured products originally became popular in Europe and have gained popularity in the U.S., where they are frequently offered as SEC-registered products. This means that they are accessible to retail investors in the same way as stocks, bonds, exchange-traded funds and mutual funds. Their ability to offer customized exposure, including to otherwise hard-to-reach asset classes and subclasses, makes structured products useful as a complement to these other traditional components of diversified portfolios.