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Constant leverage certificates: Effectively leveraging daily performance

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Vontobel Markets
11/01/20223 min read
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Contents

Constant leverage certificates offer a simple and efficient way to participate in stable price trends, be they rising or falling. They do so by leveraging the daily price performance of a so-called reference instrument, for example a share or an index. This allows investors to participate disproportionately in the performance of this reference instrument. The factor – i.e. the leverage – remains constant, and so the investment is equivalent to a reinvestment on a daily basis.

Disproportionately high participation thanks to a constant factor

With constant leverage certificates, investors participate in the leveraged daily price performance of the reference instrument. These are open-end products, with no fixed expiry. The certificate tracks the performance of an underlying factor index at a fixed ratio. The valuation price is the closing price of the reference instrument for a given index calculation day. The index level calculation is based on the change in the valuation price compared to the previous day. The factor index implements the leverage, i. e. it disproportionately reflects the performance of the reference instrument on a daily basis by multiplying the change in its value by a constant factor. Each Vontobel constant leverage certificate has a corresponding factor index as its underlying. Detailed data are published for these indices, ensuring a high degree of transparency.

Vontobel constant leverage certificates – high transparency, simple access

Each Vontobel constant leverage certificate has a specifically created factor index as its underlying. Vontobel calculates factor indices with factors of various sizes on a wide range of different reference instruments. Investors are assisted in their selection of constant leverage certificates by a wealth of information – such as the product features, daily prices and historical performances on Vontobel’s website for structured products, markets.vontobel.com. The certificates are linked to the Vontobel index website. At https://indices.vontobel.com, you can easily get more detailed information on the performance and structure of the various factor indices. Being able to find such an extensive range of relevant index-related information so quickly means that investors can navigate efficiently and get the full picture of these products.

Successful investment requires stable trends and the right market expectations

Volatility does not have an impact on the pricing of constant leverage certificates. At the same time, constant leverage certificates are highly dependent on trends. This means that, although they offer opportunities for disproportionately high gains, the leverage works in both directions and can also result in disproportionately heavy losses – and ultimately even a total loss of the investment. Such losses occur when – contrary to the investor’s market expectation – the price of the reference instrument moves in an unfavorable direction for the constant leverage certificate.

Investors must also be aware that a factor index can suffer significant losses in volatile sideway phases, even though there has been no significant change in the price of the reference instrument over the period as a whole. Due to the specific way in which the factor indices are calculated, in cases of sideway movements in the value of the reference instrument (i.e. the price alternately rising and falling) the result can be losses for the factor index and thus also for the constant leverage certificates based on it.

Long or short – it all depends on the market expectations

A factor index Long pursues a «long» strategy. The index value increases disproportionately when the price of the reference instrument rises, and it decreases disproportionately when the price of the reference instrument declines. A factor index Short behaves in the opposite way, rising/falling disproportionately when the price of the reference instrument declines/increases. A factor index Short thus reflects a trend opposite to that of the reference instrument.

Exchange-rate-effect

If the certificate is denominated in a different currency to the underlying factor index and the reference instrument, the performance of the constant leverage certificate may deviate from that of the factor index and the reference instrument, which may or may not be beneficial to the investor. The investor therefore bears the risk of fluctuations in the exchange rate.

Risks

Important Notice

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.