Stock market psychology is a subject in itself. Alongside hard factors such as economic growth, interest rate movements and corporate profits, emotions too have an influence on market events. One common feeling that investors have is the fear of missing out. This FOMO, as it is known, must have been particularly widespread at the start of August, when the markets came under pressure after months of upward travel. This was only a short intermission for the bears, though, as prices turned upwards again in anticipation of the about-turn in rates in the USA along with a soft macroeconomic landing. In Switzerland, the SMI® reached its highest level since April 2022. In retrospect, therefore, that would have been the opportunity to build or expand a position in equities.
FOMO, though, is one of those things: the fear of missing out conflicts with worries about getting the timing wrong. At the time of a correction, no one knows how long prices will continue falling. If the buy decision is made too soon, the position that has been opened can quickly end up in the red. There have always been trading models that leave psychology out of the equation. This is where capital is allocated on the basis of hard and fast rules. Such an approach is pursued by the new drop back note from Leonteq. Following the motto of “buy the dip”, the underlying strategy systematically exploits phases of weakness to increase the allocation in the equity asset class. At the start of the three-year term the structured product is positioned half in the SMI® and half in cash. The allocation in the leading Swiss index is made via an exchange traded fund. Leonteq uses a physically replicating ETF from iShares for this purpose.
The cash component bears interest. At 4.00% p.a., the coupon significantly exceeds the income achievable on the CHF bond market. The drop back note collects the interest continuously and passes it on to the product holders by way of a distribution every twelve months. As soon as the SMI® comes under pressure, the balance of power between the two asset classes can shift. The first trigger mark stands at 90% of the starting level. If the underlying falls below it, the strategy buys more. The equity share thus rises to 75%, with the cash component falling accordingly. As soon as the SMI® ETF falls below the threshold of 85% of the initial value, the exposure to equities increases to 90%. The third and lowest mark is 80%. In the event that the index fund slips below it, the remaining cash holdings are liquidated and invested in the benchmark index. The product would then consist entirely of shares.
The new issue offers the possibility of utilising market setbacks for purchases. As the triggers are monitored on a daily basis, the strategy responds even to very short-lived weaknesses. In any case, entry is gained at significant discounts to the initial level. This function leads to smoothed purchase prices in rather the same way as a savings plan. If there is no correction, the capital doesn’t just sit around doing nothing, because the cash component comes with an attractive interest rate. The portfolio is passed on to investors on the repayment date, so they receive the ETF holding and/or the cash funds. All in all, this new issue is aimed at investors who consider further setbacks a possibility, but generally have a positive view of the market. After all, there is little point in having minimal access costs if prices do not head upwards again. One way or another, the drop back note allows capital to be allocated largely free of emotion. Although there is a risk of price losses, holders of the structured product do not need to spend much time thinking about FOMO over the next three years.
We look forward to answering all of your questions about our products and how they are traded. Please don't hesitate to get in touch! Phone: 058 800 11 11, email info@leonteq.com or contact us here.