Tracker certificates, also known as exchange-traded notes (ETNs), are a modern investment tool that helps investors gain exposure to a wide range of assets. They are formally debt securities issued by a financial institution, and their value is designed to directly mirror the performance of a chosen underlying asset or index. This structure offers a simple and cost-effective way to track asset performance without the need to purchase the asset directly.
How Tracker Certificates Work
Instead of owning the actual asset, investors buy a certificate whose value is tied to the asset’s price movements. The issuer of the certificate, which can be a financial institution or a special purpose vehicle (SPV), either holds the underlying assets or uses derivatives to replicate their performance. These certificates are often listed on exchanges, providing liquidity and making them accessible to a broad investor base.
While it doesn’t make sense to use a tracker certificate for easily accessible assets like a stock you can buy from any broker, they are particularly valuable for non-traditional assets or baskets of securities. For instance, an investor can use a tracker certificate to gain exposure to a cryptocurrency, avoiding the complexities of setting up a crypto wallet and managing the associated technical risks.
The value of the certificate is calculated based on a pre-determined formula that links it to the underlying asset’s price. For example, a certificate tracking an index will move in lockstep with the index. If the index increases by 5%, the certificate’s value will also go up by 5% before any fees. They can even be used to track actively managed portfolios, allowing investors to gain exposure to professional management without investing in a traditional fund.
Advantages of Using Tracker Certificates
Tracker certificates offer several benefits for investors:
- Accessibility and Diversification: They provide a simple way to get exposure to assets that might otherwise be difficult for individual investors to access, such as commodities, foreign indices, or specialized managed portfolios. Being listed on exchanges also provides liquidity and ease of trading, allowing investors to buy or sell throughout the day.
- Cost-Effectiveness: Compared to many actively managed funds that have high management fees, tracker certificates can be a more affordable option, especially those tracking passive indices.
- Targeted Exposure: They allow investors to focus on specific investment themes or strategies, such as investing in a portfolio of digital assets like Bitcoin and Ethereum, providing a straightforward way to participate in a sector without the complexities of direct ownership.
Key Risks and Considerations
Before investing, it is essential to understand the associated risks. A primary risk is credit risk, as tracker certificates are unsecured debt obligations of the issuer. This means that in the event of the issuer’s bankruptcy, you could lose your entire investment. Even if the certificate is issued by a properly managed SPV with “ring-fencing” provisions, a bankruptcy can still cause years of delay in recovering the security’s value.
It’s also crucial to ask the issuing company if the certificate is fully backed by the underlying assets. Some issuers may use derivatives to replicate performance instead of holding the actual assets, and holding the asset is generally more secure.
Other potential issues include tracking error, which is the difference between the certificate’s performance and the underlying asset’s due to fees and expenses. There is also liquidity risk, as some certificates may have low trading volumes, making it difficult to sell them at a fair price.
It’s important to remember that a listing on an exchange does not automatically guarantee liquidity, especially for certificates listed on lower-level platforms like MTFs. Finally, management fees can reduce returns over time, so it’s vital to understand the fee structure before you invest.
Use as a Structuring Tool
Beyond their use as a pure investment vehicle, tracker certificates can also be used as a structuring tool for personal assets. Packaging a portfolio into a certificate can offer enhanced privacy for the ultimate investor, such as a family office, and may even provide tax benefits depending on local laws. This use of an intermediate SPV layer to serve these purposes is not unique to tracker certificates, but it is one of their applications.
Tiner Wernow (formerly John Tiner & Partners) designs and creates securities and other financial instruments that help clients raise capital, sell managed trading strategies, and securitize various assets.
We offer a complete, full-cycle service, from developing the initial structuring concept to its full implementation, which includes acquiring an International Securities Identification Number (ISIN), handling issuance, global clearing, exchange listings, and placement routes. We can transform any asset or investment idea into an easily tradable and globally cleared security.
Our global services platform, 208Markets, provides issuance, brokerage, and SPV maintenance services across multiple jurisdictions.
Additionally, we’ve created educational materials under the “Tiner Educational Hub” to help professionals understand the securitization tools available to achieve their business objectives more efficiently.
