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Sunday, February 5, 2023
HomeEconomyOpinion - Bernardo Guimarães: Is it worth investing in COEs?

Opinion – Bernardo Guimarães: Is it worth investing in COEs?

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Investments in Structured Operations Certificates (COEs) have grown a lot in recent years. The profitability of a COE depends on the change in the prices of one or more stocks. Each has its rules.

Is it worth investing in COEs?

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Ideally, we would decide on investments knowing the risks and the average return on each product.

The problem is that calculating the average yield of a COE is very difficult.

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First of all, it would be necessary to know the characteristics of COE shares: the average valuation; how much they fluctuate in general; how their oscillations are related. Technically, it would be necessary to estimate the mean, variance and covariances of changes in the prices of these stocks.

Then, it would be necessary to simulate many possible paths for these stocks and obtain the COE returns for each of them. Then, taking the average, we would arrive at the expected yield.

It is clear, for those who do not study or work with this, that calculating the expected return of a COE is like remembering things that no one has seen. It’s impossible.

But I study and work with it.

So I, Otavio Bitu and Bruno Giovannetti calculated the expected returns of the COEs sold by the largest distributor in the market for individuals in recent years. There were about 2,000 products.

A first result is that most COEs have an expected yield lower than that of a public bond in the Dinheiro Direto.

There is, however, considerable heterogeneity among the COEs.

We can classify COEs into two types.

COEs of the first type are simpler: in general terms, if the COE’s share price rises, the investor receives a positive return at the end of the period; if stocks devalue, the investor doesn’t gain, but he doesn’t lose money either, or he loses only inflation.

These products reduce the risk of investing in stocks, but they also reduce the return.

An alternative would be to buy an ETF with part of the money and invest the rest in Treasury Direct. On average, this alternative will yield a little more. Also, you have liquidity, you can easily sell your investment if you need to.

This alternative, however, does not offer guaranteed principal. If that’s important to your peace of mind, a COE might be a good idea.

In that case, a COE that gives you a return linked to a stock index tends to be better than a COE that gives you a return linked to an individual stock. This is because the stock index considers many different companies and therefore spreads the risk. In general, some stocks do well and others do poorly.

A second type of COE is more complicated. Here’s an example: if Apple, Facebook and Netflix shares appreciate in the semester, the COE pays a nice return and that’s it. If at least one does not appreciate, the COE continues. This process is repeated every six months. If at the end of two years the COE still continues, the money is returned, without interest.

These complicated COEs with uncertain maturities are bad. Virtually all of them yield less than a direct, risk-free treasury investment. Not worth it.

Why are those of this type so much worse than the others? That’s a good question with an interesting answer, but it’s a topic for another column.

This issue has implications for financial market regulation.

An investor does not receive enough information for a good decision. Those who produce cookies need to put on the packaging how many calories, fat and sodium their product has. The COE issuer should have to inform buyers of the expected return on its product, calculated in a manner determined by regulation.

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