Many investors were surprised to learn that Exchange-Traded Funds (ETFs) and Exchange-Traded Notes (ETNs) were not as safe as brokerage firms and financial professionals had promised. In fact, losses during the economic downturn were so great that some investors were completely wiped out.
Exchange-Traded Funds (ETFs) and Exchange-Traded Notes (ETNs) spark controversy because, as The Wall Street Journal has pointed out, “[b]anks and brokerage firms advertised them as offering payouts both steadier and more lucrative than plain-vanilla investments such as bonds or index-tracking funds. Most professional money managers avoided them.” The reason why they were avoided? “There is no such thing as an investment that is both safe and highly profitable.”
While Exchange-Traded Funds (ETFs) and Exchange-Traded Notes (ETNs) are both legitimate investments, the broker must take into consideration his or her clients’ investment profiles before recommending them. Failing to do so may make brokers and brokerage firms liable for their clients’ losses.
As FINRA makes it clear in its “Suitability” rule (2111):
A member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile. A customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.
If you lost money because you have leveraged ETFs and/or leveraged ETNs in your account, it is important to know that you have rights. The securities lawyers at Peiffer Wolf will fight for the full recovery of your losses. Peiffer Wolf is currently representing investors who have suffered significant losses due to unsuitable investment advice, investors with overconcentrated investment portfolios, and investors with portfolios that don’t match their risk profiles. If you are an investor who has suffered losses, contact us today for a FREE portfolio evaluation.
Investors should be able to trust their broker, brokerage firm, or financial advisor. In fact, financial advisors encourage investors to believe in them. By building trust, brokers and financial advisors create a relationship that is relied upon by investors. Unfortunately, some brokers and advisors abuse this trust and put their interests before yours. Sadly, many brokers and brokerage firms claim that they are acting in the best interest of the investors when they are actually motivated by their own greed and commissions.
An ETN with three-times leverage would triple any gains — but also triple losses. ETN holders can collect dividend payments if the underlying assets increase in value, and they can buy or sell the notes on an exchange. If an ETN falls below a certain price, the bank has the option to redeem the note, often paying investors just a fraction of what they originally paid.
What all the products had in common was the potential to deliver robust returns at a time when economic growth was slow and a mountain of sovereign bonds around the world was offering investors no income at all.
The risks were so great that, in 2012, “regulators sanctioned banks for failing to educate investors about the risks of leveraged ETFs.”
This year , at least 15 ETNs managed by UBS have been taken off the market after tumbling in value. ETNs run by Citigroup and other firms have suffered significant losses. When troubled funds are taken off the market, investors typically are paid just a fraction of what they initially put in.
Peiffer Wolf is currently representing investors who have suffered significant losses due to unsuitable investment advice, investors with overconcentrated investment portfolios, and investors with portfolios that don’t match their risk profiles. If you are an investor who has suffered losses, contact us for a FREE portfolio evaluation.
What are ETFs?
Exchange-traded funds, knows also as ETFs, “are SEC-registered investment companies that offer investors a way to pool their money in a fund that invests in stocks, bonds, or other assets. In return, investors receive an interest in the fund.”
The SEC recommends investors who are thinking about adding ETFs to their portfolio “read its summary prospectus and its full prospectus, which provide detailed information on the ETF’s investment objective, principal investment strategies, risks, costs, and historical performance (if any).”
What are ETNs?
Exchange-traded notes, knows also as ETNs, “are unsecured debt obligations of financial institutions.” They “generally do not pay interest to their holders. Payments on ETNs may be linked to well-known broad-based securities indexes or based on indexes tied to emerging markets, commodities, volatility, a specific industry sector (e.g. oil and gas pipelines), foreign currencies, or other assets.”
Also according to the SEC, “Many ETNs are issued with maturities of 20 or 30 years, and are not intended to be held to maturity. Accordingly, returns to an investor generally arise from trading the ETN rather than from holding the ETN to maturity.”
What is the difference between ETNs and ETFs?
“ETFs are registered investment companies. An investor in an ETF owns shares of a fund, which represents an ownership interest in an underlying portfolio of assets. An ETF discloses to investors the value of its portfolio of assets by publishing an end-of-day net asset value and by disseminating an estimate of its value generally every 15 seconds during the trading day, which is sometimes called an intraday indicative value. An ETF issues and redeems its shares in creation units, at their net asset value.”
“Unlike ETFs, ETNs do not own an underlying portfolio of assets and this makes holders of ETNs subject to the creditworthiness of the issuer. As ETNs do not own assets, when issuing new ETNs, ETN issuers calculate the value of the ETN using a described formula, rather than using net asset value.”
What are the risks of having ETFs in your portfolio?
According to Business Insider, “some ETFs are very thinly traded, providing wide bid/ask spreads and lower liquidity. Furthermore, there can also be instances where technical issues can cause a performance gap between the ETF and the index it tracks, known as tracking error.”
“As a final point, it’s worth mentioning that there is some counterparty risk with ETFs — for example, even if you ‘own’ physically-backed gold through the SPDR Gold Trust (GLD), there is a chance that in extreme situations that you may not actually get to see the benefit of that gold. The counterparty risk stems from the possibility of a party failing to deliver on their promises, and is actually quite common to see with other types of assets, as well.”
What are the risks of having ETNs in your portfolio?
As highlighted by The Wall Street Journal, “An ETN with three-times leverage would triple any gains — but also triple losses. ETN holders can collect dividend payments if the underlying assets increase in value, and they can buy or sell the notes on an exchange. If an ETN falls below a certain price, the bank has the option to redeem the note, often paying investors just a fraction of what they originally paid.”
If you believe you were a victim of investment fraud or broker misconduct, it is imperative to take action. Peiffer Wolf has represented thousands of victims, and we remain committed to fighting on behalf of investors.