Securities Lawyers Blog
The investment attorneys with Gana Weinstein LLP are investigating investors who were inappropriately recommended leveraged exchange-traded funds (ETFs). ETFs, also called exchange-traded notes (ETNs) when backed by a note rather than underlining assets, are speculative and volatile investment offerings.
An ETF is a registered investment trust whose shares represent an interest in a portfolio of securities that track an underlying benchmark or index. Shares of ETFs are typically listed on national securities exchanges and trade throughout the day at prices established by the market. These non-traditional ETFs differ from other ETFs in that they seek to return a multiple of the performance of the underlying index or benchmark or the inverse or opposite performance.
To accomplish their objectives non-traditional and leveraged ETFs typically contain very complex investment products, including interest rate swap agreements, futures contracts, and other derivative instruments. Moreover, non-traditional ETFs are designed to achieve their stated objectives only over the course of one trading session, i.e., in one day. This is because between trading sessions the fund manager for a non-traditional ETF generally will re-balance the fund’s holdings in order to meet the fund’s objectives and is known as the “daily reset.” As a result of the daily reset the correlation between the performance of a non-traditional ETF and its linked index or benchmark is inexact and “tracking error” occurs. Over longer periods of time or pronounced during periods of volatility, this “tracking error” between a non-traditional ETF and its benchmark becomes compounded significantly.
FINRA advised brokerage firms in June 2009 in NTM: 09-31 concerning non-traditional ETFs that “[d]ue to the effect of compounding, [non-traditional ETFs’] performance over longer periods of time can differ significantly from the performance…of their underlying index or benchmark during the same period of time.” Because of these risks NTM: 09-31 advised broker-dealers that non-traditional ETFs “are typically not suitable for retail investors who plan to hold them for more than one trading session, particularly in volatile markets.” FINRA has found that brokers must under these important features of non-traditional ETFs that make them incredibly risky investments.
Due to recent market volatility numerous ETFs and ETNs have shut down and redeemed their offerings due to devastating losses. One example is UBS ETRACs including symbols HDLV, SMHD, DVHL, CEFL, CEFZ, BDCL, LBDC, MORL, MRRL, LRET, MLPQ, HOML, MLPZ, LMLP and WTID. Close to 30 of these ETRACs leveraged and inverse exchange-traded products had been delisted, closed, or automatically accelerated due to volatility in the wake of COVID-19. These products are being delisted as they fall in value below the minimum listing standard outlined in the offering documents.
Other issues linked to volatile sectors like oil & gas have also been redeemed or lost significant value such as Citigroup’s VelocityShares 3x Long Crude Oil ETN (UWT) and Inverse Crude Oil ETN (DWT).
Brokers have a responsibility treat investors fairly which includes obligations such as making only suitable investments for the client after conducting due diligence. Due diligence includes an investigation into the investment’s properties including its benefits, risks, tax consequences, issuer, history, and other relevant factors.
Investors who have suffered losses are encouraged to contact us at (800) 810-4262 for consultation. At Gana Weinstein LLP, our attorneys are experienced representing investors who have suffered securities losses due to the mishandling of their accounts. Claims may be brought in securities arbitration before FINRA. Our consultations are free of charge and the firm is only compensated if you recover.