BRCs reloaded: ETFs as underlyings

The market for barrier reverse convertibles (BRCs) benefits from the diversity of underlyings, and this is precisely where the expansion comes in. Previously, anyone wishing to acquire a BRC on a broad market at Vontobel had to rely on major indices such as the SMI®, Euro Stoxx 50® or the S&P 500®. More specific exposures, for example to an individual sector, a region outside the standard indices or a clearly defined investment theme, could only be represented via individual shares, which can be associated with specific company risks.

ETFs (exchange-traded funds) close this gap. They bundle a large number of securities into a single, exchange-traded instrument and are now available for almost every conceivable sector: Technology, cryptocurrencies, sustainability, emerging markets, dividend stocks, small caps or broadly diversified global ETFs. By making ETFs usable as underlyings for BRCs, Vontobel is transferring this diversity to the world of return optimization.

The combination of BRCs and ETFs opens up new opportunities: With three crypto ETFs, BRC investors now have a modern investment theme at their disposal.

The iShares Bitcoin Trust ETF (IBIT) from BlackRock physically holds Bitcoin and directly tracks its price performance. Since its approval at the beginning of 2024, IBIT has been one of BlackRock's most popular ETFs in terms of net inflows (Yahoo Finance, 23.12.2025). It offers institutional and private investors a regulated, listed way to participate in the price performance of the largest cryptocurrency without having to hold Bitcoin themselves.

The iShares Ethereum Trust ETF (ETHA), also from BlackRock, follows the same principle for Ether, the native currency of the Ethereum network. It is one of the largest spot Ethereum ETFs on the US market and gives investors access to Ethereum's price performance without having to hold Ether themselves. This eliminates the operational hurdles and custody complexity associated with holding Ether directly.

The Bitwise Solana Staking ETF (BSOL) represents a special feature. In addition to the primary objective of tracking the price performance of Solana, the ETF pursues a secondary objective: staking is intended to generate additional tokens as income. In this context, staking refers to active participation in the consensus mechanism of the Solana network, for which validators are remunerated with network fees. BSOL thus offers an additional yield component.

Crypto ETFs have a significantly higher volatility profile than traditional equity or index ETFs. The price movements of Bitcoin, Ethereum and Solana can be significant in short periods of time, which increases the risk of a barrier being breached compared to other underlying assets. In addition, digital assets are subject to specific risks such as regulatory changes and technological risks of the underlying networks.

In order to take account of this increased risk, multi barrier reverse convertibles can also be launched with European barrier observation, for example. With this type of barrier, a check is only carried out at the end of the term to determine whether a barrier has been touched.

An important advantage of ETFs is their risk profile. Individual shares can exhibit high volatility depending on the security, while broadly diversified ETFs are typically significantly lower. Under certain market conditions, depending on the level of the barrier and the choice of ETF, the lower volatility can help to reduce the probability of a barrier being breached, but does not guarantee a lower barrier breach. This allows investors to reduce company-specific risk. Instead of bundling several individual shares from one sector into a basket, a sector ETF can be based on a large number of companies. This provides investors with a solution that can offer attractive coupons, although the risk remains largely dependent on market performance.

This opens up new ways for investors to supplement their own portfolio with barrier reverse convertibles. Anyone with a sideways market view on individual sectors can express this opinion directly via a BRC on the corresponding sector ETFs in future, without having to decide on individual companies. Thematic convictions can also be translated into a BRC structure.

BRCs on ETFs carry the same risks as BRCs on other underlyings. Depending on the product structure, the repayment of the nominal depends on whether the relevant underlying or - in the case of corresponding structures - the underlying with the worst performance touches or falls below the barrier during the term and how it is quoted in relation to the strike price at the end of the term. If this is not the case, the final value of the ETF with the worst performance is settled in cash at the final fixing. Losses up to the total loss of the capital invested are possible.

Investors should also bear in mind the issuer risk. The repayment of the invested amount and any coupons depends on the creditworthiness of the issuer. If the issuer becomes insolvent, investors may suffer losses, regardless of the performance of the underlying asset.

Finally, it should be noted that BRCs may trade below their theoretical value during the secondary market phase, particularly in phases of increased market volatility. A premature sale could therefore lead to losses, even if the barrier has not been touched.