Accelerate your investments with bull and bear certificates
Would you like to be able to leverage a position without incurring excessive costs? And would you like to have full control over your risk?
Then bull and bear certificates might be an interesting product for you. Certificates are investment products with leverage, which means that the value of your investments will rise or fall faster than the value of the underlying asset. For example, they can be used to hedge risk compared to a regular stock portfolio, or to get extra leverage of between 2-15 times into an investment. This allows you to increase your gains if you have a position that you have a lot of faith in, but if you're wrong, the losses will naturally be correspondingly larger.
The development of the value of the certificate depends on how the asset that the certificate tracks develops. You can trade certificates based on shares, indices, commodities or currencies. The certificates can be traded on Nordnet, for example, see an overview of some of them here.
How leverage works
Bull & Bear are terms that describe your belief in whether the value of the underlying asset will rise or fall.
When you invest in Bull certificates, it means that you expect the value of the underlying reference asset to increase. This is also known as 'going long'. If the value of the asset increases, the value of your Bull certificate will also increase. Conversely, if the value of the asset falls, the value of your Bull certificate will also fall. For example, a certificate that follows gold will rise in line with the gold price.
When you invest in Bear certificates, this means that you expect a decrease in the value of the underlying reference asset. This is also known as "going short". If the value of the asset falls, the value of your Bear certificate will rise. And if the value of the asset rises, the value of your Bear certificate will fall. For example, if you believe in a positive development for Tesla, you can buy the product 5x Long from the product provider Vontobel.
At first glance, the names of the certificates may seem a bit convoluted, but in reality they describe quite precisely which asset the product follows and with what leverage. As in this case, BULL TESLA X5 VN7, which indicates that you are buying a bull certificate that follows Tesla share, that it is leveraged five times and that the Swiss provider of structured products Vontobel (VN) is behind the certificate.
On Nordnet's page for the certificate, you can also see the so-called ISIN code, which is an easy way to specify a code for this particular product. Once you have an ISIN code, you can enter it in the search box and this way you can find a specific product.
Benefits of certificates
The certificate works simply in the sense that if the price of Tesla increases 1% in one day, the certificate increases 5% on the same day. Similarly, there is of course a risk of losing 5% if the share loses 1% in value on the day.
Similarly, there are certificates for many of the other major shares, such as Apple, AMD, Meta, Alphabet and NVIDIA. They can be searched for on Nordnet via this page. At the top of the ISIN/Name field, you can enter the name of the share or the unique ISIN product code, if you have it.
The certificates have a number of advantages over other leveraged products, including low cost. Products are priced differently depending on which provider you choose, and you can save a lot if you understand how costs are calculated. Here's an example of the costs you can expect when shopping for certificates availability.
You can typically trade the certificates for small amounts if you wish, making it possible for smaller investors to trade the products liquidity. Under normal market conditions, it is usually possible to trade the certificates at all times, as the provider sets a bid and ask price, ensuring that you can trade your certificate. However, a liquidity risk may arise in markets where there are large price fluctuations or where technical interruptions may disrupt trading.
Be aware if the market goes sideways
Investors should be aware that the leverage is reset every day. This adjustment makes it possible to keep the leverage constant, so the investment can be seen as a reinvestment on a daily basis.
Bull & Bear certificates can offer the potential for high profits, but of course also a high loss because there is leverage in both directions. The certificate can lose value when there are phases where the market goes sideways, even though the price of the underlying reference asset has not changed over a long period of time.
Here's an example to show what this means. If you buy a 5x long certificate in the German index DAX for 100 EUR, it can develop as follows:
If the DAX were to fall by 2% the following day, the so-called factor index would lose 10% and would now have a price of 90 points. The factor index reflects the movements of the benchmark, in this case the DAX index, on a daily basis and the price movements are intensified by the leverage (the factor).
If the DAX recovers the day after the original level - i.e. a 2.04% increase from 98 to 100 - the factor index will not trade at 100, but only at 99.18, even though the price of the underlying asset is back at the same level. This is because the price is calculated as 90*(1+(2.04*5%/100))=99.18 EUR.
As a result, the factor index would have lost 0.82% percent, even though the price of the reference instrument would be traded at the original level.
Bull and bear certificates are therefore not suitable for a medium to long-term buy-and-hold strategy.
When buying a certificate, you should also be aware that you are buying the certificate from a provider. This means that there is an issuer risk and the money is lost if the provider goes bankrupt. Certificates are not protected by investment or depositor guarantees.
Cost of certificates
Certificates are usually passively managed investments, which means there are fewer administration costs. This makes certificates a relatively inexpensive financial product to invest in. Let's take an example to show how you can invest in a leveraged version of Microsoft stock. You can do this with the certificate BULL MSFT X3 VN1.
If you buy and sell the certificate on the same day, you only pay the so-called spread. This is the difference between the buy and sell price, which is shown in the left-hand corner of the screen, and is typically a fairly modest cost - at the time of writing 0.27%. The spread is also shown as a percentage in the top band on the Nordnet screen and can vary throughout the day.
It is worth paying close attention to the spread, as certificates from different providers can have very different spreads, and you should try to minimize costs where possible.
If you hold the certificate for a longer period of time, you will also pay a financing spread and an index fee of 0.5% and 1.0% respectively on an annualized basis. This corresponds to an additional cost of approximately 0.006% daily, assuming that there are approximately 250 trading days in a year.
The certificates can be traded on Nordnet, and investors should be aware that the platform may add additional costs when buying the certificate. On Nordnet, you can click on "See cost breakdown" before buying to see the total costs associated with the purchase.
This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.
The products are not capitalprotected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.
This information is neither an investment advice nor an investment or investment strategy recommendation, but advertisement. The complete information on the trading products (securities) mentioned herein, in particular the structure and risks associated with an investment, are described in the base prospectus, together with any supplements, as well as the final terms. The base prospectus and final terms constitute the solely binding sales documents for the securities and are available under the product links. It is recommended that potential investors read these documents before making any investment decision. The documents and the key information document are published on the website of the issuer, Vontobel Financial Products GmbH, Bockenheimer Landstrasse 24, 60323 Frankfurt am Main, Germany, on prospectus.vontobel.com and are available from the issuer free of charge. The approval of the prospectus should not be understood as an endorsement of the securities. The securities are products that are not simple and may be difficult to understand. This information includes or relates to figures of past performance. Past performance is not a reliable indicator of future performance.