KBC is marketing a new exchange-traded product in Belgium. The Tracer Long is a structured product with capital-at-risk and a maturity of up to two-years, which allows investors to profit, with limited leverage, from a potential increase in the value of an underlying.

Filip Gils (pictured), head of product innovation & product development, KBC Capital Markets Brussels and head of KBC Capital Markets London, and Ivo De Saedeleer, product innovation & product development manager, KBC, gave SRP the lowdown about why they are launching the new product, how it compares to a turbo, and who is the target audience.

The Tracer Long positions itself between an investment in a stock or an index and an option or a turbo, according to Gils. "The investor in a Tracer Long takes a bullish position in the value of the underlying," said Gils. "Compared to an investment in a single name stock, or index, and collecting the dividend and pay taxes on the latter, a Tracer Long invests the expected dividend to create additional upside above a reference level."

If the end value of the underlying is higher than the reference level, the investor will benefit via the product's leverage factor from a higher end-value compared to the actual value of the same underlying, according to Gils. "In the opposite case, if the underlying drops below its reference value at maturity, the Tracer Long will end at the same value as the value of the underlying single name stock or index."

KBC Markets has launched 22 Tracers Long to date - with leverage factors of between 1.38 and 2.22 - all of which are denominated in euros. Of these, 21 products are linked to a single share and one product, AEX Tracer Long, is linked to an index. The securities are issued via KBC's international finance company (IFIMA), and KBC Bank London Branch acts as market maker.

By the end of the year KBC Markets expects to have 50 to 100 Tracers Long available, according to Gils. "The product is designed for self-directed clients [...] and we have also successfully distributed the Tracer Long to our private banking clients.

"It was our intention to offer a structured product [...] which is easy to understand, allowing investors through the products' listing on Euronext Brussels to get easy access to the Tracer Long via online brokerage platforms," said Gils. "The product has a low cost on which KBC Markets offers continuous bid/offer pricing."

Gils believes there is still room for listed structured products which fit somewhere in between a single name stock and a turbo. "The turbo market offers more leverage to the clients, but can become very costly if an investor holds the turbo for a long period, and it is more risky if the underlying drops and knocks out - which is not the case for the Tracer," said Gils.

The market of leverage products such as turbos and sprinters is very competitive while looking for a low cost product with a longer investment horizon, according to Gils. "What we are saying is: 'our store is open, come and get it'. The only role we play is that of the market maker and ultimately we aim at self-directed customers."

The product is open to everyone, added De Saedeleer. "There is no restriction to Belgian investors only. As long as you have a securities account and your broker has access to Euronext, you can buy and sell Tracers."

Although KBC Markets has only started issuing Tracers recently, the feedback it has received until now has been very positive, according to De Saedeleer.

"Most people in KBC Private Banking are interested, although some of them prefer to stay long on the single name stock they currently have in position, and not to substitute it in a Tracer Long with the same underlying," said De Saedeleer, noting that some private banking investors see periodically dividends as a kind of replacement income, "so they prefer cash dividends rather than a leveraged upside position on a single stock".

"The way I see it is that the market is coming back from offering capital protection," said De Saedeleer. "Of course, ideally everyone wants some form of capital protection, but right now you can offer very little upside to the customer."

With interest on savings deposits in Belgium on an all-time low, equities are more or less the only option to earn some upside right now in case of bullish equity markets, according to De Saedeleer.

"The good thing about the Tracer is that the downside is identical as for the same single name stock, which is something people are familiar with, and that's why they are prepared to give up capital protection."

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