Tracker Certificate

What are Tracker Certificates?

A tracker certificate is a structured product that allows investors to participate in the performance of an underlying asset without owning the asset itself. Similar to investment funds, normal tracker certificates function by tracking the price movements of an underlying asset, which could be a single stock or a basket of individual stocks representing the entire stock market, like an index certificate or exchange-traded fund (ETF).

Investors anticipate gains or losses based on the movement of the underlying assets. If the value of the tracked assets increases, the value of the certificate rises accordingly, providing a profit. Conversely, if the underlying assets decline, the certificate value also decreases. This creates a combination of risk and protection for investors.

Tracker certificates are issued by financial institutions and involve certain risks, such as issuer risk and currency risk, which may impact the product's value. Investors should consider factors like expected dividends, currency risks, and the potential for declining prices when deciding to invest in tracker certificates. The certificates may track specific assets, such as a stock basket, making them a good alternative for those who prefer not to physically hold individual stocks.

Tracker Certificates Explained

Tracker certificates, similar to exchange-traded funds (ETFs), are financial instruments that allow investors to gain exposure to underlying assets without directly owning them. These certificates are listed on stock exchanges, providing investors with access to a variety of assets.

The certificate tracks the performance of an underlying asset, often represented by a price index or a basket of individual shares. Investors can anticipate gains or losses based on the movement of the underlying asset. In the event of falling prices or a decline in the underlying instrument, the value of the tracker certificate also declines.

In the context of structured products, tracker certificates offer an alternative to directly holding individual shares, providing investors with the ability to trade and gain exposure to various assets. The certificates have a fixed maturity period, and their value is influenced by market dynamics. While they offer the potential for gains, investors should be aware of the risks involved, including the lack of protection in the face of unfavorable changes in the underlying asset's price.

Advantages and Disadvantages

Advantages

1. Unlimited Income Potential. One notable advantage of tracker certificates is the potential for unlimited income. Investors can benefit from the positive movements in the underlying asset's price, leading to potential gains without an upper limit. This unlimited income potential can be appealing to investors seeking higher returns.

2. Cost Efficiency. Tracker certificates typically have a cost advantage as their usual underlying asset is an index of shares, which may include foreign stocks. This structure saves investors money since they are not required to buy individual shares within the index separately. The cost efficiency of tracker certificates makes them an economically feasible option for investors looking to diversify their portfolios without the need for direct ownership of multiple stocks.

3. Liquidity. Many tracker certificates are traded on exchanges, making them relatively liquid compared to some other investment products. Investors can buy or sell these certificates easily during market hours, providing flexibility in managing their investments.

Disadvantages

1. Lack of Protection Against Unfavorable Changes. A significant disadvantage of tracker certificates is the lack of protection against unfavorable changes in the underlying asset's price. If the tracked index or individual assets within it experience a decline, the value of the tracker certificate also decreases. This lack of protection exposes investors to potential losses in the event of adverse market movements.

2. Market Risk. Tracker certificates are exposed to market fluctuations, and the value of the certificate is directly tied to the performance of the underlying assets. If the market experiences significant declines, investors holding tracker certificates may incur losses.

3. Issuer Risk. Investors face the risk associated with the financial institution or issuer of the tracker certificate. If the issuer encounters financial difficulties or goes bankrupt, it could impact the value and redemption of the certificates.

Usage

1. Concrete Investment Themes. Tracker certificates are often based on concrete investment themes, such as cryptocurrencies or the stocks of companies with good gender-diversity ratings. Investors can use tracker certificates to align their investments with specific themes or trends in the market.

2. Index Tracking. Trackers can be linked to an index, similar to an exchange-traded fund (ETF) or index fund. These products, known as index certificates, track the value of all the assets underlying the index. Investors use these certificates to gain exposure to a broad market index, providing diversification within their portfolios.

Maturity

Sometimes, a tracker certificate does not have a fixed maturity date, allowing investors to hold the security for an indefinite period. The absence of a fixed maturity date in tracker certificates means investors can retain the security for as long as they desire.

However, it's important to note that there are also tracker certificates with a fixed maturity date. In such instances, holding the certificate until the maturity date results in the investor automatically receiving the value of the investment in their stock account. This fixed maturity date introduces variability within the product category, highlighting the big difference between tracker certificates without a fixed maturity and those with a predetermined endpoint.

To illustrate, let's consider an example where an investor holds a tracker certificate linked to a commodity. If this certificate lacks a fixed maturity date, the investor has the flexibility to retain the security based on their investment strategy. On the other hand, if the certificate has a fixed maturity date, the investor will receive the value of the investment in their stock account automatically when that date is reached.

Tracker Certificates VS. Investment Funds

Normal tracker certificates, unlike investment funds, represent debt claims against the issuer, typically a bank. When you invest in a tracker certificate, you are essentially holding a debt claim against the bank that issued the certificate. This means that the underlying asset being tracked doesn't belong to you but rather to the issuer (the bank). The certificates are not divided into shares, and investors do not own a share of the underlying assets.

Investors in tracker certificates may anticipate falling prices or declines in the underlying instrument, exposing them to potential losses. Despite this risk, tracker certificates provide a way for investors to gain exposure to specific assets or themes without direct ownership.

In contrast, investment funds are structured differently. They are divided into shares, and investors own these shares. The shares of investment funds are classified as segregated assets in Switzerland, meaning they are owned by the individual shareholders and not by the fund managers or the issuer. This ownership structure provides investors with a direct claim to the underlying assets held by the investment fund.

Investing in shares of investment funds involves a different dynamic compared to tracker certificates. Investors sign up to be shareholders, and their ownership is legally recognized. This distinction ensures that the assets held by the investment fund are separate and distinct from those of the fund managers or issuer.

Risks

1. Underlying Instrument Declines. The value of tracker certificates is directly tied to the performance of the underlying instrument. If the underlying instrument experiences declines in value, the tracker certificate's value also falls. Investors should be aware of the potential for losses in the event of adverse market movements.

2. Currency Risk. Currency risk arises when the underlying asset is quoted in a different currency. For instance, if the Dow Jones is quoted in USD or DAX 30 in EUR, there is an additional layer of risk due to fluctuations in currency exchange rates. Changes in currency values can impact the certificate's value, leading to potential gains or losses, even if the underlying asset remains unchanged. Some tracker certificates may offer an embedded currency hedge to mitigate this risk, as specified in the security's terms.

3. Credit Risk. Similar to an equity investment, investors in tracker certificates take on credit risk from the issuer. Credit risk refers to the possibility that the issuer may encounter financial difficulties or default on its obligations, impacting the value and redemption of the tracker certificates. Evaluating the creditworthiness of the issuing institution is crucial for investors.

4. Liquidity Risk. Tracker certificates may face liquidity risk, especially in exotic markets or with less commonly traded assets. If the market for the underlying assets is illiquid, it could be challenging to buy or sell the tracker certificates at desired prices, potentially leading to suboptimal outcomes for investors.