A tracker certificate is a structured product which lets you invest in an underlying asset without actually owning the asset. From an investor perspective, tracker certificates work much like investment funds. The tracker follows the price of an underlying asset (one or more stocks, for example). You buy a certificate based on the tracker. If the value of the underlying asset goes up, the value of the certificate goes up with it. If the underlying asset loses value, the certificate loses value.
You can buy tracker certificates on stock exchanges which they are listed on. Many of these certificates track underlying assets at a ratio of 1:100. That means that you can invest just a fraction of the amount which would be required to buy the actual underlying asset. Example: You invest in a tracker certificate which is based on a stock basket with a value of 10,000 francs. Because the tracker certificate uses a ratio of 1:100, you only need to pay 100 francs for the certificate. If the price of the underlying stocks goes up by 10 percent (to 11,000 francs), the value of the certificate will also go up by 10 percent (to 110 francs).
Trackers are often based on concrete investment themes. For example, there are trackers which follow cryptocurrencies or the stocks of companies with good gender-diversity ratings. Trackers can also be linked to an index, in which case they track the value of all of the assets underlying the index, much like an exchange-traded fund (ETF) or index fund. These products are known as index certificates.
Tracker certificates can also be used to profit off negative price developments. This is the case with so-called bear tracker certificates which take a short position on the underlying asset.
Important: Tracker certificates do not normally pay out dividends. If you hold a certificate which tracks the stock of a company which pay dividends, you will not receive them. However, you may receive some form of compensation from the certificate’s issuer in some cases.
Some tracker certificates have an expiry date. That means they only track an underlying asset for a predetermined length of time (one year, for example). The certificate matures at the end of that period, at which point you as the investor are paid out its going value at the time of expiry.
Unlike investment funds – which are divided into shares and owned by investors – tracker certificates are simply debt claims against the issuer (the bank which offers them, for example). That means the underlying asset which you are investing in does not belong to you, but to the issuer. Shares of investment funds, on the other hand, are classified as segregated assets in Switzerland, and are owned by you as the shareholder rather than by the fund managers.
In practice, investors are not likely to notice the difference. But whether you hold tracker certificates or fund shares makes a big difference when an investment company becomes insolvent. Tracker certificates are not protected against issuer bankruptcy, and fall into the pool of general debt claims against the bankrupt party.
If the issuer of a tracker certificate goes bankrupt, you may very likely lose all or part of the money which you invested in the tracker certificate. This danger is known as counterparty risk. By investing in tracker certificates, you agree to carry the counterparty risk.
Because tracker certificates are complex structured products, they bear an exceptional amount of risk. Taking time to carefully read the information provided and study the fine print before you invest in this kind of certificate is recommended.
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