With the S & P 500 up marginally in 2025 and bonds seeing sharp price swings, structured notes could give investors a combination of returns and downside protection – if used carefully. Structured notes are hybrid assets: They combine a debt instrument with derivatives, and they’re tied to the performance of another asset, like a stock or an index. These notes can also offer investors some measure of protection to mitigate downside in this underlying asset. Investors who purchase these investments are expected to hold them up until their maturity date to capture their full benefit. These notes come in different flavors. For instance, some generate income , while others offer some level of principal protection in the form of a buffer. The notes are primarily in the wheelhouse of sophisticated and high-net-worth investors due to their complexity. “People want both the downside protection and the income,” said Ashton Lawrence, certified financial planner and senior wealth advisor at Mariner Wealth Advisors in Greenville, South Carolina. He has used income notes to complement clients’ fixed income sleeve. “Each one will have different characteristics that will make it advantageous in a fixed income allocation.” UBS recently highlighted a certain structured note strategy that aims to combine downside protection and the prospect of gains at a favorable tax rate. Step-down trigger autocallable notes as diversifiers The firm called out step-down trigger autocallable notes, or SD-TANs, in a May 19 report that touted their ability to complement a portfolio that holds stocks and bonds. “Historically, SD-TANs have exhibited a low correlation to other asset classes, attractive returns, and a very low probability of losses,” said Daniel Scansaroli, head of portfolio strategy and UBS Wealth Way Solutions, chief investment office, Americas, at UBS. “While they have been unlikely to outperform direct stock investments, they have historically outperformed bonds, especially on an after-tax basis, in most market environments,” he added. In UBS’s example, the firm discusses a note that’s linked to the S & P 500 and the EuroStoxx 50 indexes, with a maturity of five years and an autocall return – or the return paid when the underlying asset reaches a certain level and is called back by the issuer – of 8.5%. If the two indexes are above their starting level after 12 months, then the note is called, resulting in a return of principal plus 8.5%, according to UBS. The longer the notes are outstanding, the greater the return. The note in UBS’s example also has a 25% step-down trigger downside protection: If the indexes are down 25% or less at maturity, the principal and the 8.5% annualized call return. If either index is off more than 25%, the investor gets the principal less the decline of the worst performing index, the firm said. Tax considerations There’s a tax planning component at work, too. These step-down trigger autocallable notes can fit in a taxable account. Unlike bond interest, which can be subject to ordinary income tax rates as high as 37% – or 40.8% if accounting for the net investment income tax – returns from these notes are treated as long-term capital gains, the firm said. That means they’d face a top tax rate of 20%, or 23.8% when including the net investment income tax. There are lots of catches for investors to be aware of, however. For starters, these notes are complicated, and investors need to be comfortable with tying up their money until maturity. The income they pay isn’t the same as what investors would get from bonds, either, UBS said. While bonds pay interest on a semiannual basis, these step-down autocallable notes are likely to be called back in 12 to 15 months – and that’s when investors pick up their returns, the firm noted. That’s something to bear in mind for investors who have time-sensitive cash flow needs they need to meet. “When considering the amount and type of structured investments to add to your portfolio, assess your objectives, risk tolerance (including issuer and underlying asset risk), and liquidity needs, as secondary markets are limited,” Scansaroli of UBS said.