So far, we’ve looked at the very basic concept of principal protected notes. In this, the second part of my three part series, we’re going to take a more in depth look at this ‘guaranteed’ investment vehicle. 

Since principal protected notes are tied to many different types of asset classes, it’s very important that you understand the asset class underneath any principal protected note that you are thinking about buying. Especially since the underlying asset is what will ultimately determine if you make any money when the note matures. Here are some examples of notes that are currently being offered with participation percentages ranging from 100% - 275%:       

JPMorgan Chase (JPM) offers a note that is tied to the performance of the Japanese and European markets.       

Lehman Brothers (LEH) offers foreign currency based notes – including including Latin American countries, China and India.        

UBS (UBS) offers a note that is tied only to an index of commodities.

While these notes can be great if they perform well, the truth is that they often do not. For example, one note from CIPC had exposure to a portfolio of stocks, including Boeing (BA), Johnson & Johnson (JNJ) and 3M (MMM), which have all performed well historically. While the note may have seemed like a safe bet, over five years it has only averaged a return of under 5% due to the recent performance of the stocks it is linked to. To give you an idea of how poor this return really is, the S&P 500 is currently averaging around 12.5% annually.