Index/participation certificates are suitable for investors who expect the underlying asset to rise in value over the short, medium, or long term. With index or basket certificates, investors do not want to commit to individual securities but rather want to diversify their risk; they therefore invest their money in a diversified index. In addition, index certificates offer exposure to underlying assets that would otherwise be unavailable to investors. They enable investments in regions, themes, commodities, and currencies. An index certificate can be used to directly track a benchmark.
How do index/participation certificates work?
Instead of investing in individual stocks, investors in an index/participation certificate participate 1:1 and without limitation in the performance of an index (underlying asset). An underlying asset corresponds to a basket of different stocks that represent a market and its performance. For example, if an investor chooses an ATX certificate, the price of the certificate rises and falls in direct proportion to the movements of the Vienna Stock Exchange’s ATX index.
With an index/participation certificate, investors can directly act on their market expectations. At the same time, the broad composition of the index allows investors to diversify their risk. Compared to an investment in a single stock, losses on one stock within the index can be offset by gains on another stock with an index/participation certificate.
Index/participation certificates generally have an unlimited term (open-end).
Example
For an ATX certificate with a subscription ratio of 100:1, the certificate costs 28 euros when the ATX stands at 2,800 points. If the index rises to 3,600 points, the value of the certificate also increases to 36 euros. If the ATX falls to 2,200 points, the certificate is then only worth 22 euros.
What to keep in mind
Index/participation certificates do not have any protective mechanisms. They are therefore fully exposed to market risk. Furthermore, investors should be aware of any adjustments to the subscription ratios for commodity certificates and any built-in currency hedges, known as “quanto.” Another important factor for an investor’s purchase decision is whether the certificate in question invests in a performance index (also known as a total return index) or a price index. With a performance index, all dividends are reinvested in the index. The investor participates in the dividend payments. This is not the case with a price index certificate.
