With this in mind, we believe that structured investments with full downside protection at maturity—such as market-linked certificates of deposit (MLCDs) and market-linked notes (MLNs)—continue to offer enhanced capital preservation characteristics, as well as a pickup in return versus short-term bonds.


What are market-linked notes (MLNs)?

Like traditional bonds, Market-linked Notes (MLNs) provide a return of principal at maturity. Unlike traditional bonds, MLNs do not pay a fixed rate of interest. Instead, they provide a rules-based payout, with the payment at maturity linked to the performance of a selected underlying index over a specific time horizon. Maturities of 2–5 years are common, and MLN returns are often based on the performance of an underlying stock market index.


Here are some indicative terms for an MLN available in the market at the time of writing (subject to change at any time):

  • Structure: Market-linked note
  • Time to maturity: 5 years
  • Underlying index: Dow Jones Industrial Average (DJIA)
  • Downside participation: Full principal protection at maturity
  • Upside participation: 110% of the underlying index's price return at maturity, subject to a cap of 70%

The benchmark for this theme is a 5-year Treasury. With a starting yield of 4.3%, we expect a 5-year Treasury held to maturity to provide a five-year return of around 23%. The exact return will depend on the interest rate environment in which the bond's coupons can be reinvested; if yields go higher, this will enhance the return from any reinvested income; but if they fall from here, this will lower the total return on the Treasury investment.


Historically, a structured investment with the terms described above would have delivered a greater-than-23% return—beating the 5-year Treasury benchmark with today’s 4.3% yield to maturity—in about 63% of all rolling 5-year periods since 1926. The note would have delivered an average return of 38% (6.6% p.a.), receiving the maximum gain (70%, or 11.2% p.a.) in about 28% of all historical 5-year rolling return periods.


It is possible that this historical analysis could underestimate the theme's chances of outperforming. The DJIA is already more than 10% from its last all-time high; historically, this would have improved the chances of a strong return over the next five years. Moreover, we expect bond yields to fall over the next five years, which would slightly reduce the return on the 5-year Treasury benchmark. Together, these factors modestly improve the likelihood that an MLN with these terms will outperform a 5-year Treasury from here. On the other hand, there are three key risks to the theme: a bear market, issuer default, and liquidity risk.


We believe that MLCDs and MLNs are especially effective as a part of a bond ladder in your Liquidity strategy, where assets are earmarked for spending over the next 3–5 years. The Liquidity strategy is designed to help you to meet any cash flow needs from the portfolio for the next 3–5 years. For this part of your wealth, the primary objective is capital preservation, with return being a secondary consideration. For more information, please see Liquidity strategy: A rising tide lifts all yields.


For more information on the UBS Chief Investment Office’s implementation recommendations, and details for the theme’s performance so far, please read the full report: Theme update: Enhancing Liquidity strategy return potential with MLCDs and MLNs.


Main contributors: Leslie Falconio, Michelle Laliberte, Daniel J. Scansaroli, and Justin Waring


Read the full report Theme update: Enhancing Liquidity strategy return potential with MLCDs and MLNs ,10 November 2022.


This content is a product of the UBS Chief Investment Office.



UBS Wealth Way is an approach incorporating Liquidity. Longevity. Legacy. strategies that UBS Financial Services Inc. and our Financial Advisors can use to assist clients in exploring and pursuing their wealth management needs and goals over different timeframes. This approach is not a promise or guarantee that wealth, or any financial results, can or will be achieved. All investments involve the risk of loss, including the risk of loss of the entire investment. Timeframes may vary. Strategies are subject to individual client goals, objectives and suitability.