A note promising principal protection promises only that the issuer will pay. If the issuer defaults, the holder joins the queue of unsecured creditors regardless of how the underlying index performed.
This is not theoretical. Holders of notes issued by Lehman Brothers, including ones marketed as capital protected, recovered a fraction of face value. Investors who had focused entirely on the equity payoff discovered they had been holding bank credit.
Practical checks: the issuing entity's own credit rating and spread, whether any guarantee comes from the parent or a subsidiary, and whether exposure across several notes is concentrated in one bank. Compare the note's yield to the issuer's ordinary senior debt to see what the structure is really paying for. See counterparty-risk.
Related: counterparty-risk, structured-product, exchange-traded-note, credit-default-swap, principal-protected-note, collateral