What is a tracker bond?
Tracker bonds are fixed-term investments where typically most of your money is invested in a deposit based account and the rest is invested in the stock market, in a stock-market index or mix of indices. You will usually have to invest a minimum of €5,000 and the term is fixed for between three and six years. You will have no access to your money during this time.
Are tracker bonds risky?
Tracker bonds are usually considered low-risk investments because many of them offer 100% capital security once you leave your money invested for the full term. This means you are guaranteed to get the original amount of money you invested back. However, even if you get all of your money back, you may have lost money because of the impact of inflation.
Generally, the lower the risk, the lower the level of return on your investment. The rate of return usually depends on the growth of the financial index which the bond tracks. There will usually be a limit on the amount of the growth you are entitled to, for example, a maximum of 50% of the growth.
The return tends to be higher in the case of tracker bonds that don’t give you 100% capital security at maturity. In some cases, the bond may also promise a minimum return (equivalent to a low fixed deposit rate of interest) if this turns out to be more than the growth achieved at the end of the investment term.
Is a tracker bond right for you?
Tracker bonds may suit you if you want to:
- Invest a lump sum and don’t need access to any of it for a set number of years
- Protect all or most of your investment
- Take only a small risk on the return you earn
The risks with these products include:
- The risk of poor returns
- Inflation risk to your capital
- An element of capital risk if the bond is less than 100% capital secure
Questions to ask
- How much of my original investment is guaranteed to be repaid when my bond matures?
- Do I get a promised minimum return?
- How is my return calculated?
- Does the bond allow for full growth of the index it is tracking?
- What is the ‘cap’ or maximum amount of the index growth I can get?
- Are there any other limits on the returns I could get back?
- What charges do I have to pay?
- Does the term suit my timescale?
Under the Central Bank’s Consumer Protection Code, your provider must give you a ‘key features’ document, which sets out the details of the product, including how the tracker bond works, where your investment goes, if and how you can get access to your investment and any tax that applies.
Example of how a tracker bond works
This is an example to show how the return on a tracker bond could be calculated and is not intended to represent any specific tracker product.
If you invest €10,000 in a five-year tracker bond with 100% capital security, it promises a rate of return after the five years of 60% of the rise in the FTSE100 index.
After five years, the FTSE100 has risen by 30%. This example shows what you could expect to get back. The return of €1,800 is roughly equal to a savings rate of 2.7% a year, after tax.
|Plus: 60% of rise in FTSE100 index
Rise in FTSE100 index = 30%
Potential gain in your bond
30% of €10,000 = € 3,000
Maximum return: 60% of gain
|60% of €3,000 gain||€1,800|
|What do you get when the bond is due for payment?|
Plus: maximum return
Total gross return
Less: exit tax (33%of €1,800)
|Amount paid out to you:||€11,206|