Zamansky warns investors about the risks from trading in exchange-traded notes (ETNs). ETNs are a type of debt security that trade on exchanges and promise a return linked to a market index or other benchmark. ETNs can offer investors exposure to everything from commodities to emerging markets, but they can be complex and carry numerous risks that may make them unsuitable or too risky for investors, and cause losses. Often, financial advisors will “push” or solicit purchases of ETNs because they carry high commissions or fees generated for the brokerage firm, in conflict with their customers’ interests.
Risks of Exchange-Traded Notes (ETNs)
Most investors are unaware of the serious risks associated with ETNs which far differentiate them from ordinary bonds. ETNs are unsecured debt obligations of the issuer—typically a bank or another financial institution. Unlike bonds, ETNs do not pay interest. ETNs are also subject to credit and default risk. This means that the ETNs could decline or suffer a loss based on the financial condition of the issue, which has nothing to do with the index or benchmark to which they relate. They can even default and suffer a total loss if the issuer files for bankruptcy, which many investors discovered when Lehman Brothers collapsed.
Exchange traded notes also trade on exchanges and their prices are determined by the market, similar to stocks. Unlike exchange-traded funds (”ETFs”), ETNs do not trade to try to replicate or approximate the performance of the underlying index or benchmark. Thus, the price of the ETN may diverge greatly from the indicative index or benchmark, resulting in unexpected risks or losses to investors. This happened recently with TVIX, an ETN based on a volatility index, which caused many investors to suffer losses from its failure to track its related index. In the case of TVIX, the deviation occurred because the issuer ceased issuing new ETNs, and demand outstripped supply creating a “bubble” that later popped.
Other risks relating to Exchange Trades Notes include: 1) liquidity risk– if a market never develops or the ETN is delisted and the market disappears; 2) holding risk – some ETNs, particularly leveraged, inverse and inverse leveraged ETNs are designed to be short-term trading tools rather than buy-and-hold investments, and the performance which differ significantly if held long-term; and 3) call, early redemption and acceleration risk –some ETNs can be called or redeemed early at the issuer’s discretion and this may occur when they are trading at a market price that causes a loss.
You financial advisor should thoroughly explain these risks to you. If he or she did not, then you may have a claim for any losses suffered in ETNs. If you are a conservative investor, ETNs may be unsuitable and inappropriate for you.
Leveraged and Inverse ETNs
The leveraged and inverse ETNs can be very aggressive and speculative products that carry high risk, similar to margin or options strategies. Most of the time, leveraged and inverse ETNs are not suitable for buy-and-hold investors. Due to way on which these ETNs “reset” their leverage daily, these ETNs can experience distortion and variance due to the effects of compounding. These effects can make these ETNs materially flawed as long-term investments, with even opposite deviations from expectations in volatile markets.
If your financial advisor has sold you a leveraged or inverse ETN, and you were not made aware of these risks, then you may have a claim for any losses suffered in ETNs. If you were a conservative or moderate investor, then these ETNs may be unsuitable and inappropriate for you, and you have a claim.
For an evaluation of your situation, please contact Jake Zamansky by telephone at (212) 742-1414 or by email at email@example.com.