Get 40% Off
💰 Buffett reveals a $6.7B stake in Chubb. Copy the full portfolio for FREE with InvestingPro’s Stock Ideas toolCopy Portfolio

Investment Certificates In The Portfolio: 5% Per Annum With Limited Risk

Published 04/03/2022, 15:41
IX
-

Investment certificates are instruments that allow you to invest in a specific underlying (share, index, etc.) and which usually present the possibility of collecting a certain coupon flow and having a protection "barrier" in the event of a negative event. (particularly important drops in the case of long certificates for example).

I don't want to get too technical, in any case volatility is one of the factors that affects (inversely) the price of a certificate, therefore (let's take for example a long certificate, so that it earns if the underlying rises) under the same conditions, if the volatility goes up, the effect on my certificate will be negative and vice versa.

Looking at the graph below, which expresses the volatility on the European market, we notice the peak of volatility (not seen since the Covid period) that we are witnessing due to the Russia - Ukraine conflict. Many certificates have therefore decreased in value, also due to the decline in the underlying assets themselves.

Therefore, with these factors in mind, it might be a good time, with due caution, to start considering the inclusion of this type of product within a well-diversified portfolio.


STOXX 60 - Chart - Source Investing.com

In addition to the propitious moment on the volatility and underlyings side, the effect could also be positive in tax terms, since any coupons on the certificate are miscellaneous income, so I could offset them against some losses I may have in my portfolio on certain securities.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads .

Europe, how are we doing?

Below I have reported the chart of the main European index (Euro Stoxx 50) which we see returning to precovid levels, with a bearish head and shoulders that appears to be on the final straight.

Euro Stoxx 50 Chart- Source Investing.com

I remember that Europe, which had suffered more than the United States since the beginning of the year, is paying a pledge following the Russia-Ukraine conflict, therefore in the space of a couple of weeks the prices have dropped a lot, and today we find ourselves with several indices below 10-15% from the beginning of the year.

Among the sectors most affected then, we have the banking sector, since the series of sanctions and blockades between countries are penalising the activity (especially of those that have, albeit minimal, exposure in Russia) of the main credit institutions.

Thus, in general, the sector in Europe is perhaps paying even more than it should (see graph below).

Stoxx Banks EUR price - Source Investing.com

Therefore, a certificate could be a possible option for those wishing to aim for a rebound in the sector (remember that we are in a context of the start of restrictive monetary policy, with generalised interest rate rises that have taken place or will take place shortly).

How to choose the right certificate

We have said above the main characteristics, in principle, however, I will have to choose (if I aim at the coupons and at a more cautious strategy) an underlying that perhaps has already lost a lot, that is found graphically close to important supports (from which it could for example bounce), with deep barriers (possibly discreet, that is that they are valid only at expiration and not during the life of the certificate) and with expirations not too distant in the time (2-3 years maximum).

At the level of underlyings, an index will certainly be more prudent than a single share, and any reduction in volatility will have a positive impact on my certificate.

Regarding the yield, structures similar to those described above, today can lead to coupon yields of around 4-5% per annum, to which an extra-yield can be added due to the price that is below par (usually the cuts are from 100 or 1000 Euro per piece).

Until next time!

If you find my analysis useful, and want to receive updates when I publish them in real time, click on the FOLLOW button on my profile!

"This article has been written for informational purposes only; it does not constitute solicitation, offer, advice, consultancy or investment recommendation as such does not want to incentivize the purchase of assets in any way. Remember that any type of assets is valued from multiple points of view and is highly risky and therefore, every investment decision and related risk remain with you"

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads .

Latest comments

So what are the market symbols / names of some of these types of assets? Who is issuing mm and where are they traded / how does one get them?
you what
?
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.