"Tracking Securities" are notes whose maturity payoffs track the price appreciation or depreciation of the reference asset. Tracking securities do not pay coupons. Instead, at maturity they pay investors a multiple of the reference asset's gains or losses. If the reference asset loses value, the notes return less than their face value.
The basic tracking security has a maturity payoff that is similar to the return to a forward contract on the reference asset. Many tracking securities expose investors to more than 100% of the reference asset’s price appreciation, which is equivalent to including an at-the-money call option with the forward contract.
It also has the same payoff as a zero-coupon, unsecured subordinated note issued by the brokerage firm, an at-the-money long call option on the reference asset, and an at-the-money short put option on the reference asset.
Portfolios with many tracking securities essentially provide investors with exposure similar to an equity index fund, but with much less liquidity and much higher costs.
Some Tracking Securities provide "buffers," or limited protection from a decline in the reference asset's value. Generally, the buffers "guarantee" a loss of no more than 100% minus the buffer amount.
Table 4 lists a few of the tracking securities which have been sold under different brand names by various brokerage firms.