Participation products: essential for every portfolio!

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  Christian Ingerl
  Redaktor

Participation products are financial investments that allow investors to participate in the performance of a specific market – such as a share index or a commodity. There are different types: On the one hand, there are tracker certificates, which belong to the structured products category. Another type is the very popular exchange-traded funds (ETFs). The third group consists of exchange-traded products (ETPs). They often relate to commodities and are therefore also referred to as exchange-traded commodities (ETCs). Although these investment products differ in terms of trading and issuer risk, they have one thing in common: they enable transparent and cost-effective participation in a wide variety of assets. As a rule, this participation takes place on a 1:1 basis and without any limits in terms of amount or time (open-end).

High benefit for the portfolio

Participation products are transparent and the way they work is simple and easy to understand.
If the underlying asset – for example the Swiss benchmark index SMI – rises by 1%, the participation product also rises by 1%, excluding costs. However, this also applies to falling markets. Traditionally, there is no capital protection to limit the risk of loss. These products are therefore suitable for investors who assume that a particular market or asset class will perform positively. As participation products are generally offered as open-end products, they are suitable for long-term investment horizons. They have become indispensable for risk diversification in portfolios. On the one hand, because many participation products are already diversified in themselves (index investments). On the other hand, the combination of several products makes it easy to create a diversified portfolio tailored to your own risk appetite and expectations.

Enormous range of systems

The fact that participation products have become an integral part of portfolio management is also due to the huge selection. Whether via tracker certificates, ETFs or ETPs – there is hardly a market or asset class that cannot be invested in. This diversity enables investors to customize their investments and react to different trends. They also provide access to markets and underlyings that would otherwise be difficult or costly to invest in. Numerous participation products with currency hedging are now also available. This allows exchange rate risks to be excluded if desired. Such investments can be recognized by the suffix “Quanto” (for certificates) or “Hedged” (for ETFs and ETPs).

Delimitation: Issuer risk

A key difference between tracker certificates and ETFs is the issuer risk. This describes the risk that the issuer of a financial product may not be able to meet its financial obligations. In the worst case scenario, this means that investors lose some or all of the amount invested. Since tracker certificates are structured products and therefore debt securities of the issuer, they involve an issuer risk. This is different with ETFs. The invested funds represent special assets that are not part of the insolvency estate in the event of the ETF company’s insolvency and are therefore protected. A distinction must be made in the case of ETPs, which are mainly offered on commodities. Although they are also issued as bonds, they can be collateralized or physically deposited (e.g. in the case of precious metals). In this case, the issuer risk is reduced.

Nuances in trading

Another difference between tracker certificates and ETFs lies in trading. As a rule, certificates can be traded both on an exchange and over the counter via the issuer. As a market maker, the issuer continuously quotes prices and thus ensures liquidity. Exchange trading is also a key feature of ETFs and ETPs. SIX Swiss Exchange, for example, is one of the largest ETF trading venues in Europe. Here, market liquidity is supported by 16 specialized market makers who offer bid and ask prices at minimum amounts and avoid prices that exceed the maximum spread.

Which product type to choose?

Whether and which participation product is suitable for an investor depends on various factors. ETFs have established themselves as the first choice for standard share indices. For investments in specific trends, such as AI or exotic markets, tracker certificates can play to their strengths as satellite investments. The issuers of structured products often react very quickly to new trends, while the issuing process for ETFs is more complex. In the case of commodities, on the other hand, investments are possible via all three types of the aforementioned participation products. The choice between ETF, ETP or tracker certificate then depends on the investor’s preferences (e.g. issuer and currency risk) and the costs of the product (e.g. ongoing costs, spread). Based on the Focus article, we have selected three participation products on silver and created an overview with the most important features.

Conclusion: Good that they exist!

The popularity of participation products is due to their flexibility, the possibility of diversification, the cost benefits and the easy access to a large number of markets. They offer investors an attractive alternative to traditional investments and have therefore become an integral part of modern portfolio management.