Zertifikat

What Is Zertifikat?

A Zertifikat, or certificate, is a type of structured product that allows investors to participate in the performance of an underlying asset without directly owning it. These financial instruments are debt securities issued by banks, whose payout is linked to the price development of specific assets such as equity, index, commodity, or currency. As investment vehicles, Zertifikate are considered derivative products because their value is derived from another asset. They are popular in European markets, especially Germany, offering various payoff profiles ranging from capital protection to leveraged exposure.

History and Origin

The concept of structured products, including Zertifikate, began to gain traction in the financial industry around the early 1990s, with initial transactions occurring in the UK. The technology and structures used to create these instruments rapidly spread across Europe. Structured products were initially conceived as a means to provide retail investors with exposure to stock market returns while potentially limiting capital risk. Their popularity expanded due to their customizable nature, offering alternatives to traditional portfolios by combining familiar investment components like bond and options. By 2014, the sales volume of structured products in Hong Kong alone surpassed that of the entire European market, indicating their global adoption and evolution over the decades.⁷

Key Takeaways

• Zertifikate are debt securities whose performance is linked to an underlying asset, issued primarily by banks.
• They offer investors customized exposure to various asset classes with diverse risk-return profiles.
• Unlike direct investments, Zertifikate carry issuer risk, meaning the investor is exposed to the creditworthiness of the issuing institution.
• Their complexity and lack of liquidity can be significant considerations for investors.
• Zertifikate do not typically pay dividends from the underlying asset.

Interpreting the Zertifikat

Interpreting a Zertifikat requires understanding its specific structure and the relationship between its payout and the underlying asset's performance. Unlike a straightforward equity investment where profit is directly proportional to price appreciation and dividends, a Zertifikat's return profile is defined by its terms and conditions. For example, a "Bonus Zertifikat" might offer a minimum payout (bonus level) even if the underlying asset declines, provided it does not breach a predefined barrier. Conversely, it might cap the maximum possible gain. An "Express Zertifikat" could offer a fixed yield if the underlying asset reaches a certain level on specific observation dates. Investors must carefully review the product's prospectus to understand these conditions, including any barriers, caps, or knock-out levels, which dictate how the Zertifikat will perform under different market scenarios.

Hypothetical Example

Consider a hypothetical "Bonus Zertifikat" on a fictional stock index, the "Diversification 500 Index."

An investor buys one unit of this Zertifikat at an issuance price of €100. The Zertifikat has the following terms:

• Underlying Asset: Diversification 500 Index
• Maturity: 2 years
• Bonus Level: €110
• Barrier: €70 (70% of the initial index level, assuming index started at 100)

Scenario 1: Index stays above the barrier.
If, at maturity, the Diversification 500 Index has not touched or fallen below the barrier of €70 during the Zertifikat's lifetime:

• If the index is at €120 (above the Bonus Level), the investor receives €120.
• If the index is at €90 (below the Bonus Level but above the initial price), the investor still receives the Bonus Level of €110, as the barrier was not breached.
• If the index is at €75 (above the barrier but below the initial price), the investor still receives the Bonus Level of €110.

Scenario 2: Index falls below the barrier.
If, at any point during the two-year term, the Diversification 500 Index touches or falls below the barrier of €70, the bonus mechanism is invalidated. In this case, at maturity:

• The investor receives a payout directly linked to the index performance. For example, if the index is at €65, the investor receives €65. If the index recovers to €90, the investor receives €90, as the bonus protection is lost.

This example illustrates how a Zertifikat can offer conditional capital protection and enhanced returns, but with specific conditions and risks.

Practical Applications

Zertifikate are utilized by investors seeking specific market exposures or risk-reward profiles that might not be available through direct investment in the underlying asset or traditional securities like bonds. They can be employed for:

• Targeted Exposure: Gaining exposure to specific indices, sectors, or commodities without buying individual constituents or futures contracts.
• Yield Enhancement: Certain Zertifikate are designed to offer attractive yields, often in sideways or moderately rising markets, in exchange for limited upside potential or conditional capital protection.
• Conditional Capital Protection: Some Zertifikate are structured to protect part or all of the invested capital, provided the underlying asset does not fall below a certain barrier level.
• Hedging: While less common for retail investors, some complex Zertifikate structures can be used for sophisticated hedging strategies against market downturns or specific asset price movements.

The European Securities and Markets Authority (ESMA) has highlighted the significance of structured retail products, including Zertifikate, as a vehicle for household savings in the EU. Regulatory bodies across Euro⁶pe, such as Germany's BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht), oversee the issuance and distribution of these products to ensure investor protection and market integrity.

Limitations and Criticisms⁵

Despite their versatility, Zertifikate come with inherent limitations and have faced significant criticism. A primary concern is their complexity, which can make it challenging for many investors to fully grasp the product's risks, potential returns, and the intricate conditions affecting payouts.

Key drawbacks include:

• ⁴Issuer Risk: Zertifikate are debt obligations of the issuing bank. If the issuer faces financial difficulties or defaults, investors could lose their entire investment, even in products marketed as "principal protected." This risk was starkly highlighted during the 2008 financial crisis with the collapse of institutions like Lehman Brothers.
• Lack of Liquidity: Many Zertifikate trade infrequently on secondary markets, making it difficult for investors to sell them before maturity without incurring significant discounts. The issuer is typically not obligated to buy them back.
• Opaqueness and High Fees: The pricing and valuation of Zertifikate can be opaque, often involving proprietary models, which makes it hard for investors to determine if the pricing is fair. They can also embed high costs, including issuance, distribution, and management fees, which erode potential returns.
• No Dividends: Investor³s in Zertifikate do not typically receive dividends paid by the underlying asset. This means they forgo a component of total return that direct equity investors would receive.
• Caps on Upside: Many Zertifikate, especially those with capital protection or bonus features, often cap the maximum potential gain, limiting participation in strong upward movements of the underlying asset.

Financial regulators and consumer protection advocates frequently warn that these products may not be suitable for average retail investors due to their complexity, hidden costs, and embedded risks.

Zertifikat vs. Optionssche²in

While both Zertifikate and Optionsschein (warrants) are derivative instruments issued by financial institutions and derive their value from an underlying asset, they serve different purposes and have distinct characteristics.

The key distinction lies in their purpose: Zertifikate are designed for structured investing with various degrees of risk and return profiles, potentially including conditional capital protection. Optionsscheine, conversely, are typically pure leverage products that offer no capital protection and carry a much higher risk of total loss.

FAQs

Are Zertifikate safe investments?

No investment is entirely "safe." While some Zertifikate offer "capital protection," this protection is often conditional (e.g., only if a barrier is not breached) and always subject to the issuer's creditworthiness. If the issuing bank defaults, the capital protection can become worthless.

How do Zertifikate generate returns?

Zertifikate generate returns based on the performance of their underlying asset and the specific payoff formula defined in their terms. This formula can involve elements like participation rates, bonus levels, caps, and barriers, which determine how much of the underlying asset's movement translates into the Zertifikat's value.

Can I lose more than my initial investment with a Zertifikat?

Most Zertifikate are structured as debt instruments, meaning your maximum loss is typically limited to your initial investment. However, certain highly leveraged or complex Zertifikate, particularly those with unlimited downside participation, could theoretically lead to losses exceeding the initial outlay if short positions are involved, though this is less common for typical retail Zertifikate. Always check the specific terms of the Zertifikat you are considering.

Are Zertifikate suitable for all investors?

Due to their complexity, embedded risks (like issuer risk and liquidity risk), and often opaque fee structures, Zertifikate are generally not considered suitable for all investors, especially those new to investing or with a low risk tolerance. Understanding the specific mechanics and potential scenarios for each Zertifikat is crucial.

Where are Zertifikate tra¹ded?

Zertifikate are typically traded over-the-counter (OTC) directly with the issuer or through brokers on organized exchanges, similar to stocks. In Germany, they are commonly listed on exchanges like Börse Stuttgart or Börse Frankfurt. The liquidity can vary significantly depending on the specific Zertifikat.