Also known as STRATS, this is a derivative instrument wherein an entity buys an asset/assets, sets up a trust and then begins issuing securities to investors. Structured Repackaged Asset Backed Trust Securities (STRATS) are similar in some ways to an American Depository Receipt(ADR) and exchange-traded fund(ETF). Through the ownership of structured repackaged asset backed trust securities, the individual investor can gain advantage from the underlying assets’ performance.
An alternative definition would be, a pooled asset vehicle, which issues security shares to individual investors through an incorporated trust. Underlying asset performance drives the return of a STRATS investment.
Here, structured products refer to those vehicles that combine two or more financial vehicles, including at least one financial derivative.
Repackaging is a process which allows a financial intermediary to gain a profit by acquiring some of the financial assets of an institution and consequently repackaging these assets in a fashion more appealing to prospective investors. Likewise, a basket of assets can be placed in a trust issuing shares signifying equity interest to investors.
For instance, the STRATS (Structured Repackaged asset backed trust security) Trust for The Allstate Corporation trades under GJT ticker symbol and the respective STRATS for Walmart trade under GJO ticker symbol.
Structured Repackaged Asset-Backed Trust Securities (STRATS) is likely to have embedded risks that resulting from repackaging the same underlying cash flows several times. This kind of structured finance can lead to highly interconnected risks. Repackaging securities into a larger structure requires issuers to anticipate potential outcomes and fully disclose risks of underlying securities to investors. The interest payments on STRATS fluctuate with the interest rates. Although it may appear conservative, Structured Repackaged Asset-Backed Trust Securities(STRATS) are prone to numerous macroeconomic risks.
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