The Swiss franc is considered a safe haven investment. In this respect, the domestic currency is particularly in demand when capital markets get nervous. This status did not change following the surprising move by the Swiss National Bank when it embarked on a turnaround in interest rates in March, ahead of the ECB and the Fed. Although the change of course towards a looser monetary policy has now also been initiated in the eurozone and the USA, the difference in interest rates between the Swiss franc and the two main currency zones has still widened markedly. At the moment, the 10-year US Treasury is yielding around 400 basis points more than the Confederation bond of the same duration. On New Year’s Eve 2023 the discrepancy was 3.16 percentage points. To that extent it is not surprising that the franc has recently softened against the US dollar. However, the devaluation is taking place when the CHF is at a historically high level.
It is not only the export industry for which the latent strength of the franc has consequences: it is also unfavourable for investors in commodities who allocate their capital in CHF. Since the natural products are traded on futures exchanges in USD, an appreciation of the franc eats into the profits of positions held in the domestic currency. Take gold as an example: in USD terms the precious metal has appreciated by 85% over the last five years. As a result of the greenback’s depreciation, the price of gold converted into Swiss francs has been unable to keep pace with the “original” (see chart). To take the imponderables associated with the exchange rate out of the equation, Leonteq has launched the Gold CHF Hedged Index. This underlying tracks the precious metal in Swiss francs. Value shifts between the USD as the commodity currency and the Swiss franc are left out of consideration.
The position in gold is taken out by means of futures contracts, with the future used being exchanged every two months. Currency hedging acts on a daily basis, the quanto mechanism neutralising fluctuations in the US dollar against the Swiss franc. As of now, this special benchmark is available for investment through an exchange-traded product, or ETP for short. On 25 November Leonteq introduced the participation product for trading on the SIX Swiss Exchange and the BX Swiss. One of the strengths of this issue, alongside its daily liquidity, is the robust product structure. The ETP from Leonteq carries the “+” suffix because it is collateralised by means of a special mechanism. A deposit is pledged with SIX SIS AG for each product. SIX Repo AG is responsible for monitoring the collateralisation on an ongoing basis. It acts on behalf of investors. Should Leonteq enter into payment difficulties (default), SIX Repo AG could realise the pledge in favour of the product owners.
Such a negative scenario is extremely unlikely, however: in the middle of October, Fitch confirmed the investment grade rating of Leonteq Securities AG at “BBB” with a stable outlook. Leonteq AG, the listed parent company, enjoys an “AA” ESG rating from MSCI and at the end of 2023 had a strong capital base totalling around CHFmn 780. The new ETP+ on the Gold CHF Hedged Index comes with a management fee of 0.32% p.a. For this modest contribution investors can add the precious metal to their portfolio without worrying about either safekeeping or the effects of the USD-CHF exchange rate. Another advantage is the low absolute price: thanks to a conversion ratio of 0.01, the ETP+ is trading at around CHF 18. In short, investors get simple, robust and low-cost access to the safe haven that is gold without having to rely on the Swiss franc to do so.
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.