Constant leverage certificates – benefit from the volatility of markets

Vontobel Markets
10/08/20223 min read

With constant leverage certificates, investors can participate in the ups and downs of markets worldwide. The certificates offer investors the option of putting their market opinion into action according to their own appetite for risk. Constant leverage certificates allow investors to participate with leverage in the performance of equities, indices, currencies, or commodities.

Volatility has a much stronger effect on constant leverage certificates, as it intensifies the movements of the underlying. Investors can generate disproportionate profits if they bet on the right direction, or they can suffer substantial losses if the market moves in the other direction.

Long or short: market expectations are crucial

A Bull constant leverage certificate follows what is known as a long strategy. The value of the underlying factor index increases disproportionately if the price of the benchmark rises, and the value drops disproportionately if the price of the benchmark falls. The opposite is true for Bear constant leverage certificates. They increase or fall disproportionately if the price of the benchmark falls or increases. Bear constant leverage certificates perform in a way that is opposite of the benchmark.

Constant leverage with a daily adjustment

Constant leverage certificates refer to a factor index that tracks the daily price change of a reference instrument in percent. The basis for calculating the price of constant leverage certificates is the price change of the reference instrument compared to the last index adjustment – normally the closing prices of the previous day.

Structure of constant leverage certificates


The factor index reflects the movements of the benchmark, such as that of an equity or a share index, on a daily basis, and the price movements are intensified by the leverage (factor). Every closing price defines a new benchmark that in turn represents the basis for the price performance of the certificate on the following day. This daily adjustment makes it possible for the leverage to be held constant, which is why the investment is similar to a reinvestment on a daily basis.

Path dependency

Constant leverage certificates are subject to strong price fluctuations. What is known as path dependency occurs because the reference price of the most recent index adjustment is always used to determine the value change of the benchmark. This means that although constant leverage certificates offer disproportionate profit opportunities, losses of the same proportion can occur because the leverage works in both directions. Investors must be aware that a factor index can lose significant value when there are sideways phases even if the price of the benchmark has not really changed over the entire time period. The reason for this is that daily yields are leveraged and not the yields over a longer period of time. A simple, fictitious example shows exactly what this means:

  • Purchase of a constant leverage certificate (long) with a factor of five on a factor index referring to the DAX® with an initial DAX® price level of EUR 100.00
  • If the DAX® were to fall by 10 percent on the following day, the factor Index would lose 50 percent and would now have a price of 50 points
  • If the DAX® were to recover to its original level on the following day – namely an increase of 11.11 percent (100/90-1) – then the factor index would not trade at 100 but only at 77.78 (50* (1+11,11%*5)).
  • Consequently, the factor index would have lost 22.2 percent, although the price of the reference instrument would be traded at the original level.

5x long on the DAX® with an initial reference price of EUR 100


Therefore, constant leverage certificates are not suitable for a medium-term to long-term buy-and-hold strategy.

There can also be an intra-day index adjustment

As an example, we will assume that the price of the reference instrument falls by 10 percent within one day. As an investor in a constant leverage certificate with a 10x factor index related to this underlying, you would suffer a complete loss of the invested capital. To prevent this from happening, constant leverage certificates are provided with a price threshold that is similar to a barrier. It describes the maximum, permissible negative (long) or positive (short) price change of the benchmark compared to its last evaluation rate. An intra-day index adjustment is made if the benchmark has strong, unfavorable price movements and if its price falls below or exceeds the threshold. A new valuation rate is determined, and a new, assumed index calculation day begins. Measurements of ongoing daily performance of the benchmark are made on the basis of the new valuation rate.

This prevents the factor index from losing a large part of its value or its entire value within a very short time. However, it should be noted that an intra-day adjustment is equivalent to realizing the losses that have occurred, because further participation in the price changes of the benchmark now takes place from the new, lower level of the factor index (long) or from the higher level of the factor index (short). The threshold is a fixed percentage value of the valuation rate, and the threshold’s absolute value is determined on a daily basis.

Investors in the products are exposed to the risk that the Issuer or the Guarantor may not be able to meet its obligations under the products. A total loss of the invested capital is possible. The products are not subject to any deposit protection.

The value of the products can fall significantly below the purchase price due to changes in market factors, especially if the value of the underlying asset falls. The products are not capital-protected

Due to the leverage effect, there is an increased risk of loss (risk of total loss) with leverage products, e.g. Bull & Bear Certificates, Warrants and Mini Futures.

Product and possible financing costs reduce the value of the products.

If the product currency differs from the currency of the underlying asset, the value of a product will also depend on the exchange rate between the respective currencies. As a result, the value of a product can fluctuate significantly.