Tracker certificates

Vontobel Markets
10 Aug 2022 | 4 min read

Tracker certificates enable investors to invest in themes, strategies, regions, or countries, making it easier to diversify even with small amounts of money. Tracker certificates replicate the performance of the underlying asset without leverage, a cap, or capital protection. Investors participate nearly 1:1 in rising and falling prices of the underlying asset. The underlying assets can especially be indices or equity baskets. In this way, you can invest in a whole stock market or basket in only one transaction without having to buy all the individual stocks. This is why tracker certificates are a great product for targeted investment in specific themes.

How tracker certificates work

Tracker certificates are characterized by the fact that they replicate the performance of an underlying asset. Investors in the certificate participate 1:1 in the performance (rising and falling prices) of the underlying assets—allowing for any management or index fee if applicable. Investors in tracker certificates bet on rising prices of the underlying assets. If the price trend goes against them, that is, when prices fall, investors bear the risk of loss.

Tracker certificates can be issued open-ended—that is, without a fixed duration—or with a fixed duration. Open-ended tracker certificates are provided with an issuer’s call right.

Static vs. dynamic

The underlying assets of the tracker certificates can be static or dynamic. The conventional baskets are static, which means that their composition remains unchanged over their duration. These are set against dynamic indices, which are managed actively or passively and whose composition can change over the duration of the tracker based on clearly defined criteria.

Thematic investing

Many trends drive the global capital markets due to their strong dynamics. In this context, thematic investments can create added value in an investment portfolio. Tracker certificates represent an efficient means of tracking these themes. With “thematic certificates,” investors can invest in well-diversified instruments capable of tracking trends in just one transaction.

Find the “right” tracker certificate: the filters

How does a tracker certificate differ from a fund?

From a legal point of view, structured products such as tracker certificates are bearer bonds. The investor therefore acquires a claim against the issuer. As a result, investors bear the issuer risk (risk that the issuer cannot meet their obligations to investors). Funds, on the other hand, are collective investment schemes in the form of a special fund. If the investment company becomes insolvent, the investment fund will be protected from creditors. Investors in a fund are, therefore, not exposed to issuer risk.


What durations can tracker certificates have?

Tracker certificates can be issued with a fixed term or without a fixed term as open-ended products. However, just because a certificate was issued as an open-ended product does not mean that there is any guarantee or requirement for the product to run indefinitely. The issuer has a call right, which is described in the terms and conditions of the product. Accordingly, the issuer has the right to terminate outstanding open-ended tracker certificates for early redemption without giving reasons. The relevant notice of termination must be published on the product page with the notice specified in the product terms and conditions in advance. In this case, the duration of the open-ended tracker certificate will end on the specified date.


What happens if an open-ended product is terminated early?

In the event of termination, the redemption amount will be determined on the relevant termination date. The redemption amount per open-ended tracker certificate on the termination date amounts to the reference price of the certificate multiplied by the ratio and the performance of the underlying asset less the management or index fee. If necessary, the calculated amount will be converted into the product currency. Redemption typically takes place nine bank business days after the termination date. All investors are entitled to payment of the redemption amount on the applicable redemption date.


How are the index constituents selected for thematic certificates?

The index constituents are usually selected according to predefined guidelines, that is, according to predefined criteria described in the index guideline or a comparable document (available on the index provider’s website). These criteria may relate to a company's core or principal activity as an index constituent, its financial and non-financial KPI, its listing on a regulated market, its market capitalization and liquidity. In this analysis phase, each selected equity can be assigned a score. The companies with the highest scores can then be included in the thematic index.


What happens if the underlying assets in a tracker certificate pay out dividends?

The use of distributions and interest paid by index constituents is laid down in the index guideline of the underlying index. The indices are often calculated as performance indices. Dividend payments, other distributions, and other income are taken into account less country-specific taxes, fees and other disclosures (“net return”).


What are the main risks of tracker certificates?

Market risk: Economic crises, the emergence of market competitors, and economic changes can have a negative impact on the price of the underlying asset(s) and on the price of the tracker certificate. This can lead to a partial or total loss of the invested capital. There is no capital protection.

Currency risk: The currency of the underlying index may differ from the product currency. In this case, the value of the certificate will also depend on the conversion rate between the foreign currency (for example US dollars) and the product currency (for example Danish kroner). As a result, the value of the certificate (in DKK) can fluctuate significantly over its duration.

Issuer / solvency risk: Investors are exposed to the risk that the issuer or guarantor may not be able to meet their obligations arising from the product and the guarantee—for example in the event of insolvency (insolvency / over-indebtedness) or an official order of resolution measures. Such an order by a resolution authority can also be issued in the run-up to insolvency proceedings if the guarantor is in crisis. A total loss of the invested capital is possible. As a debt instrument, the product is not subject to any deposit insurance.


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

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.