A shower of certificates with protected capital

The good performance of the markets favors the certificates sector, with a shower of new issues. Watch out, however, for the complexities of the instrument, which advise prudence in the choice. In essence, it is an instrument issued by an intermediary which allows you to take a position on an underlying financial asset, a share, a stock index, a currency, a commodity or an interest rate. “The certificate is a securitized derivative: its value derives from the price of another asset and the physical underlying is not invested directly, but a contract is formalized between the issuer and the investor”, says Giovanni Pedone, an independent financial consultant. The investor can have access to a particularly wide range of investment strategies, from simple upward or downward replication of the underlying, to more complex solutions ranging from protection on the fall of the underlying up to a certain level (barrier), protection which can be total or conditioned by certain parameters. Up to solutions that provide for a return during the life of the certificate upon the occurrence of certain events. «All in a single instrument, usually characterized by a minimum denomination of a few hundred euros, and listed». The statistics released by Acepi (the association of issuers) signal the good performance of the sector. In the first quarter of this year, the number of products offered, 376, was the highest ever, 10% more than the previous record, recorded in the fourth quarter of 2022. Which suggests not an episodic event, but a trend that is consolidating. Between January and March, the value placed stood at 5.57 billion euros, against 4.08 billion in the previous quarter and 3.77 in the period January-March 2022. The bulk of the market is made up of capital-protected products, followed by conditionally protected products, with BNP Paribas Issuance and UniCredit being the main issuers, ahead of Vontobel and Societe Generale.
Pedone warns about the increased costs in the placement phase: “The intermediary who takes care of the operation receives a commission, generally between 1 and 1.5%, which raises the cost to be borne by the investor, therefore it is better to buy the certificate on the secondary market (once listed, ed) ». How much do these solutions cost and how much do they make? Answering is not easy, given that each product has its own characteristics. Precisely this introduces further complexity in the evaluation phase of the product, which does not have recurring commissions (such as those typical of management of funds and ETFs). In addition to the negotiation commission and that already mentioned in the case of purchases during the placement phase, it is necessary to consider the difference between the price of the purchase orders and those of sale. “It is usually limited to around 1%, but under stress it widens significantly,” adds the independent consultant.
“Our findings show that on average a certificate has a significantly higher cost than an ETF, which also replicates the performance of an underlying”, underlines Danilo Zanni, CEO of IoInvesto Scf.
The ability to combine yield and protection is, on the other hand, the main attractive factor, together with the possibility of diversifying «not only by type of underlying, but also by market expectations, upwards or downwards», says Giovanna Zanotti, scientific director of Acepi. You also mention another point in favor, tax efficiency, “that is, the fact that the earnings generated by the certificates can compensate for any capital losses generated in the previous four years”. In essence, there is no tax on capital gains up to the amount of the loss mirrored on other investments. An opportunity that also concerns any earnings through shares and bonds, while profits deriving from active funds and ETFs are excluded from compensation.
A not negligible aspect: consultants often focus on certificates precisely to take advantage of this advantage when they are faced with portfolios with previous losses.
Pulling the threads of the speech, which type of investors are these instruments suitable for? “As with other financial products, it depends on how you use them and your risk appetite,” comments Michele Fanigliulo, head of investment solutions at Intermonte’s digital division. «It is a category of very different solutions, so it is necessary to read the kid carefully (the document with the summary of characteristics and costs, which must be delivered to the retail investor before signing, ed) ». So, in addition to agreeing on tax efficiency, it adds the ability to generate yield asymmetries. «Let’s think of a 106% protected capital over four years on the Chinese stock market and a 150% cap. You invest knowing that, badly, the product will pay a 6% return on maturity. Furthermore, the portfolio will be more resilient to any volatility spikes». On the other hand, you are exposed to issuer risk, “for which it is essential to verify the solidity and reliability of whoever proposes the product”, underlines Zanni. In this regard, Fanigliulo’s indication is to «always diversify among the subjects proposing the instruments».