Two interest rate index products are now available on neon invest.

You may have heard that the Swiss National Bank has lowered its interest rates in recent months, making savings accounts less attractive for those looking to grow their money. However, in other major economies, interest rates remain significantly higher as of November 2024: 4.75% in the US and 3.25% in the EU. As a Swiss investor, however, it is not that simple to open and have a savings account in these regions (unless you move there). But there is another way for you to profit from those higher foreign interest rates.

Indeed, you can invest in products that are indexed to the interest rates of other markets that have attractive rates over a long period of time. For example, in index products that are closely (and immediately) following the interest rate of the Fed (the United States’ central bank), or the European Central Bank.

By investing in such products, you can benefit from interest rates over time. The annual interest rate increase will also apply to the interest earned in previous years, resulting in compound interest. It is basically like getting interest on your investment money, while still being able to withdraw your money (i.e. sell the interest products) any time.

These products are referred to as «overnight index return» products because they are based on the «overnight rate» – the rate at which banks lend or borrow cash from one another in the short-term interbank market, which is closely aligned with central bank interest rate targets.

Let’s consider a simple example: If you invest 1’000 USD in a product indexed to an interest rate of 4% (which stays constant throughout the year) in the first year, your investment would grow to 1’040.81 USD by the end of that year. The 0.81 USD are the compounding effect described above. If, in the second year, the interest rate would be at a level of 3%, without investing more money, you would end up with an investment value of 1’072.50 USD. Of course, this is a very simplistic calculation without looking at risk, cost, and taxes and you should not rely on it to make a decision. This example just serves to explain the principle of such products. You can find more detailed and accurate calculations in section 3 of this blog.

Now, we would like to explain 2 overnight index return products from our partner Leonteq:

What are the Leonteq overnight products?

As mentioned, the overnight return index products are based on the overnight rate. Their growth is tied to the level of the overnight rate, which is closely influenced by the central bank’s interest rate policy in the region or country to which they refer.

In our case, the two overnight products currently available on neon invest are offered by Leonteq, a stock-listed Swiss company with a global presence across Europe, the Middle East, and Asia. They created two overnight index return products, which you can find in the neon app: The EUR Interest Tracker and the USD Interest Tracker.

The Leonteq EUR Overnight Return Index, available on neon invest as «EUR Interest Tracker (Leonteq)», tracks the development of the Euro’s short-term rate, also known as the «ESTRON rate», which serves as a comprehensive measure of the cost of borrowing EUR cash overnight. So it provides returns tied to the interest levels in the Eurozone. The price of the Leonteq EUR Overnight Return Index increases every day by 1/360 of the current yearly ESTRON interest rate. Currently (as of 13.11.24), this is 3.16%/360. You can see what this increase looks like by clicking this link.

The Leonteq USD Overnight Return Index is similar to the EUR Overnight Return Index. The key difference between the two is that the USD Interest Tracker from Leonteq tracks the movements of the United States’ Secured Overnight Financing Rate (SOFR), which serves as a comprehensive measure of the cost of borrowing USD cash overnight. The Leonteq USD Overnight Return Index therefore provides returns tied to United States’ interest levels and it grows daily by 1/360 of the SOFR rate (as of 13.11.24, this is 4.81%/360). You can also have a look at its latest performance here.

These instruments can be bought and sold like shares and ETFs, meaning you can buy and sell them at any time in the neon app when the exchange is open. To see more details about them in the neon app, you can either search for «Interest» in the neon invest search bar, or you can click on the «Explore» tab on neon invest, scroll down to «Topics», and then select «Interest».

But before deciding to invest in one of these assets, you need to understand their cost structure and the investment conditions (amount, duration, etc.), which have an important impact on the performance you can expect. Read on below for 2 examples with different performance outcomes.

What gains can I expect from these products?

The basis of the gains are the interest rates of the currency (EUR or USD), plus the additional gains from the compounding effect. The returns of the two assets are not paid out (like a dividend would), but are reflected in the asset’s price development, enabling compounding interests. This also means that, in order to get a return with these products, investors have to sell them.

Please note that additional factors reduce the actual gains:

Currency fluctuations and risk:
Despite being traded in CHF, the price fluctuation of these assets is influenced by the exchange rate. The EUR Interest Tracker is influenced by the EUR/CHF exchange rate: You can see its performance translated into CHF by clicking this link and selecting «All time» in the Period drop down menu. Exactly as its EUR counterpart, the price fluctuation of the USD Interest Tracker is influenced by the USD/CHF exchange rate. You can find its performance translated into CHF by clicking this link (also here, select «All time» in the Period drop down menu).

Costs:
When you buy one of these two products, you pay 0.5% in trading fees per trade and the mandatory Swiss stamp duty of 0.15% per trade. Additionally, there is a small spread of 0.02% (this is the difference between the bid and the ask price of a security) and the TER, or asset management fee, which lies at 0.1% per year and is automatically deducted from the performance. This asset management fee is in line with other similar products on the market, like this example from DWS. Click here for more information on trading costs, and here for further information on the spread.

Security:
Leonteq Overnight Return products are fully collateralised. This means that in case of default (for example, if Leonteq was to declare bankruptcy one day), these assets are secured by other assets that are used as collateral and can be sold to offset a potential loss. The collateral is allocated to cover an exact value, it works like an insurance specifically applied to your asset. The 0.1% admin fee (TER) is mainly used to cover the cost of this «insurance».

Investment conditions:
Your investment conditions (amount invested, date and time of the investment, investment duration) play a great role in the performance you can expect from investing in these products. In the next paragraph, you will find an example of two different cases where the investment conditions make it more or less interesting to invest in such an asset. So before investing in overnight rate index products, you should consider all the aspects mentioned above. If you want to dive deeper, keep on reading!

Diving deeper: 2 examples to illustrate the importance of your investment conditions in its performance

Now, let’s look at two examples of different investment conditions to illustrate whether or not these conditions, combined with the expected performance and cost structure, make it worthwhile to invest in an overnight return index.

In the graph and its detailed explanation below, we compare a 30-day investment duration with a 365-day investment duration.

Both investments have the same characteristics: the same amount invested (10’000 CHF) in the same product (USD Interest Tracker) with the same cost structure. We take the same assumed interest rate performance in that year (4.6%).

In the first example, the 30-day investment duration isn’t long enough to be worthwhile. It results in a loss of 94.42 CHF.

In the second example, the 365-day investment duration leads to a gain of 335.40 CHF because it benefits from the interest rate over a longer period of time.

Example 1 in detail:

• If you invest 10’000 CHF in the USD Interest Tracker (Leonteq) and you leave your money in there for 30 days, assuming that in that year the SOFR index performance is 4.6%, so (4.6%/360) per day, it means an increase of (10’000*(1+(4.6%/360))^30-10’000), including the compound interest. So the value of your investment would be 10’038.40 CHF with a total increase in value of 38.40 CHF.
• Please note that this is an example based on a hypothetical interest rate that remains stable and on the assumption that there is no change in the exchange rate.
• But then, you need to deduct the costs. Some costs occur directly: For buying and selling in order to get the return of your investment, you pay the trading fees and stamp duty equal to 2*(0.5%+0.15%) of the 10’000 CHF invested, so 130 CHF. Then there are costs which you don’t pay directly but are lowering the return: The management fee of 0.1% is pro-rata deducted from the performance, so it’s 0.1%*(30/365), equalling 0.0083% of your investment, which is 0.83 CHF. In addition, the 0.02% spread amounts to 2 CHF. This means the total costs are 132.82 CHF for this 30 day investment (buy and sell total).
• We did not consider the effect of the CHF/USD exchange rate on the trade dates, which might also reduce or increase your gains.
• Given the high discrepancy that we can already see between the gains vs. costs (38.40 CHF - 132.82 CHF = a loss of 94.42 CHF), we can say that in this example, your investment would not be worthwhile as the duration is too short for you to benefit from interesting returns.

Example 2 in detail:

• If you invest 10’000 CHF in the USD Interest Tracker (Leonteq) and you leave your money in there for 1 full year (365 days) and…
• … assuming the same hypothetically stable performance of the SOFR index as per the first example, that is 4.6% in that year, the value of your investment would be equal to (10’000*(1+(4.6%/360))^365-10’000)=10’477.40, with a total increase in value of 477.40 CHF (compound interests included).
• Now, let’s now look at the costs: The direct costs, such as the trading fees and stamp duty, equal to 2*(0.5%+0.15%) of the 10’000 CHF invested, so 130 CHF (same as in the first example). Then there are costs which you don’t pay directly but are lowering the return: The management fee of 0.1%, which is pro-rata deducted from the performance, will amount to 0.1% of your investment, in this case of 365 days, so 10 CHF in total. In addition, the 0.02% spread stays at 2 CHF. This means that you would pay a total of 142 CHF for this 365 days investment (buy and sell total).
• In this second example, the gain stays higher than the cost (477.40-142=335.4 CHF). Although we did not yet consider the effect of the CHF/USD exchange rate on the trade dates, which might also reduce or increase your gains, we can say that from the current perspective, this investment example is more interesting because it benefits from the interest rate increase over a longer period of time.

Diving deeper: The «overnight rate» explained

As you may know, the amount of money a bank has fluctuates daily based on its lending activities and its customers' withdrawal and deposit activity. A bank may experience a shortage or a surplus of cash at the end of each business day. Banks that experience a surplus often lend money overnight (short-term) to institutions that experience a shortage of funds so that the latter can maintain their reserve requirements. Requirements like this are in place so that the banking system remains stable and liquid. The overnight rate is the interest rate at which a bank can lend or borrow money, either through central bank facilities or from another depository institution that is taking part in the overnight market. Therefore, financial products linked to overnight rates provide a simple way to earn returns that automatically adjust with market conditions, offering flexibility and keeping investments aligned with central bank policies.