If you want to invest in stocks, diversification and a long-term perspective are essential for weathering periods when markets plunge. Or, maybe you’d just like some structured notes. These complexly engineered products have been successfully pitched at investors who want stock market exposure without stock market risk, and at least some idea of what their eventual return will be. As good as that might sound, portfolio manager Ben Felix says structured notes are a second-best approach to addressing stock market volatility behind traditional diversification with stocks and bonds and maybe cash. “At the retail level, the target audience for structured notes is really unsophisticated investors with low financial literacy,” said Mr. Felix, who is chief investment officer at PWL Capital. There was about $41-billion invested in structured notes within the full-service brokerage channel at the end of last year, according to Toronto-based Investor Economics, an ISS Market Intelligence business. That’s up 12 per cent over the previous 12 months, a period of declining interest rates and strong stock market returns. Stocks have been choppy lately as a result of the trade war, a development that is bound to stoke interest in structured notes among advisers with nervous clients. One of the unique things about these notes is that they’re primarily adviser-sold. They don’t generate much DIY investing buzz like, say, exchange-traded funds. The pitch with structured notes is that they allow investors to tap into the return of a particular stock index or basket of stocks with either partial or full protection of principal over a set term of, say, three, five or seven years. Returns are calibrated using formulas applied to the performance of the underlying securities. Also, headline returns may represent a best case outcome as opposed to a locked-in result. “It’s hard to do research on these things,” Mr. Felix said. “You have to sit down with each one individually and model what the expected payoff is.” What you can be sure of with structured notes is that profitability for the issuer is baked in. Mr. Felix used the example of notes with returns tied to a particular index - expect to find that you’re in line to get the simple returns of the stocks in the index, without dividends. The issuer keeps those. Mr. Felix said financial instruments called options are used to build the principal protection in structured notes. He said the cost of this protection is expensive and further cuts into returns. Likely because they’re mainly sold by advisers and not direct to investors, the level of disclosure for structured notes is jargon-infested and unhelpful. Don’t expect plain-language sales documents like regulators require for ETFs and mutual funds. If your adviser recommends structured notes, here are a few questions to ask: