Specialist terminology explained in simple terms

Active investing

Active investing involves attempting to achieve a better return than the performance of a comparable market index.

Historically, however, it is very rare for investors to beat the market index as the substantial management fees charged by the funds have a lasting impact on the return.

Bond

A bond is a security which gives the investor the right to an agreed interest payment and to repayment of the money invested. Most bonds are government bonds, corporate bonds or Pfandbriefe. Bonds are also traded on exchanges. In addition, some funds (e.g. ETFs) invest in bonds, thus enabling diversification.

Depositor protection

A depositor protection scheme protects investors’ capital in the event of insolvency. This provides a guarantee for investors that they will receive the money protected by the depositor protection scheme if their bank becomes insolvent.

Diversification

Diversification refers to the distribution of invested assets across various forms of investment. These may vary in terms of asset class and type of security (equities, bonds, cash), the countries invested in and the sectors in which companies operate. In the case of funds (in particular ETFs), the issuer is also relevant for diversification purposes. A well diversified portfolio helps the investor to spread and therefore considerably reduce the risk.

Dividend

The dividend is the part of its profits that a joint-stock company pays to its shareholders.

If you invest in companies via a fund such as an ETF, the dividends are paid to the fund provider. The provider can either pay out the dividends or reinvest them in fund units, with the result that dividend payment is reflected in the value of the fund. This type of fund is also known as an accumulating fund.

ETF

ETF stands for exchange-traded fund, i.e. an investment fund traded on the stock exchange that generally tracks an index (such as the SMI for Swiss equities).

ETFs track an index as precisely as possible and usually have lower costs than other investment solutions. ETFs are traded on the stock exchange at their current price. However, transactions may also be executed after close of trading via a broker. ETFs are known as “passive” funds because the fund manager does not attempt to beat the index with an allocation that differs from it (an “active” approach). With this passive investment strategy, ETFs pursue the objective of tracking the index as precisely as possible.

Passive strategies have lower costs, and many studies show that fund managers rarely manage to beat the benchmark index over an extended period of time (after costs and adjusted for risks). The average product costs for ETFs are around 0.25%, whereas actively managed funds can easily cost 1.50% per year or more.

Fee

When it comes to investing, fees are extremely important as they directly reduce the profit on the investment. It is much easier to increase the return with lower costs than it is to do so by improving the selection of investment instruments. The most important and highest costs arise from the management fee (administration fee), performance fee, bank charges, product fees and retrocessions (including indirect costs). It is therefore essential to consider all fees when investing your money.

Hedge fund

Hedge funds are funds which are subject to less stringent legal or other restrictions. The primary reason they are purchased is because they promise higher returns, but this also means that they involve higher risks.

High-frequency trading

High-frequency trading is a form of trading carried out by computers. The strategy is to invest for a very short time (usually just a few seconds) with the aim of generating an above-average return. An algorithm reacts to various market developments in order to take advantage of short-term market movements and distortions.

Index

An index illustrates the performance of a group of equities or other financial instruments over time.

Investing

Investing means tying up your money or other assets in financial instruments over an extended period of time. The expectation is that the investment will increase your assets, but it is also important to be aware of the risks you are taking on.

Investment instrument

The term investment instrument refers to the instrument in which money is invested. Investment instruments generally belong to asset classes such as equities, bonds, real estate, derivatives and funds (such as ETFs).

Issuer risk

An issuer is an entity which issues securities. The issuer risk therefore refers to the risk of the issuer not being able to pay the shares, the loan including the promised interest payments or the dividend back to the buyer of the securities.

The only types of investment not affected by issuer risk are physically replicated funds. They do not form part of the bankruptcy assets and enable the buyer to retain the securities they purchased.

Passive investing

Passive investing involves buying low-cost (index) funds which track the performance of a market (index) very reliably. Due to its low costs in particular, passive investing enables investors to earn attractive returns for the same risk.

Physically replicated ETFs

Physically replicated ETFs are the counterpart to synthetically replicated ETFs. In the case of physically replicated ETFs, the issuer actually buys the underlying financial instruments and holds them in a special fund. As a result, there is no additional issuer risk for the investor.

Investment in ETFs should generally be restricted to physically replicated ETFs.

Portfolio

When an investment is spread across a number of securities, the totality of these securities is referred to as the portfolio. The portfolio contains all equities, bonds, etc., in which the investor has invested. A portfolio containing a broad variety of assets is useful for the purpose of diversification.

Retrocessions

Retrocessions are payments that an investor makes to banks or investment advisors. In many cases, these payments are hidden away in the small print rather than being disclosed transparently. Since these payments have a significant negative impact on performance, investors should generally avoid investments with retrocessions.

Return

Return (also called performance) is the change in the value of an investment or a portfolio as a percentage. It is calculated using either the time-weighted method or the money-weighted method. Since the time-weighted method ignores the time at which investments are made, it is the most suitable way of assessing an investment’s success on a long-term basis.

Robo advisor

Short for robotic advisor, robo advisors serve to digitise and automate the services of a traditional financial advisor. However, not only the advisory process but also the investment itself is completely digitised. An algorithm compiles an optimal investment portfolio and monitors it continually. If a portfolio stops performing in line with the investment strategy, the investments are automatically reallocated.

Stamp duty

The Swiss Federal Tax Administration charges a tax known as stamp duty in Switzerland.

Stamp duty is levied as a transaction tax on purchases and sales of investment instruments such as equities, bonds, structured products, investment funds, ETFs and other securities. It is deducted directly by your bank or broker. The amount depends on which exchange the investment instrument is traded on:

Stamp duty on domestic securities: 0.075%

Stamp duty on foreign securities: 0.15%

Stock picking

Stock picking is when an active fund manager attempts to beat the market by actively investing in individual assets which he or she considers to be high-growth assets. For that reason, stock picking is also referred to as active investing.

Synthetically replicated ETFs

Synthetically replicated ETFs are the counterpart to physically replicated ETFs. In the case of synthetically replicated ETFs, the issuer does not buy the underlying financial instruments and hold them in a special fund.

As a result, the investor is exposed to an additional issuer risk.

Investment in ETFs should generally be restricted to physically replicated ETFs.