After the 2008 financial crisis, many investors began looking for investment opportunities that would allow them to “catch up” on losses suffered in retirement plans. With interest rates at historic lows, traditionally “safe” investments such as bonds offered little income. Banks and brokerages began to expand and advertise Exchange-Traded Notes (ETNs) as lucrative, steady payouts.
Since 2008, there has been an explosion of both Exchange Traded Funds (ETFs) and ETNs. Both products allow investors to bet on anything from industry segments, to currencies, to entire markets or other investment vehicles such as real-estate investment trusts (REITs). ETNs, however, are debt instruments and don’t own the assets they bet on. Banks can pull the notes off the market if they fall too low and investors are then bought out, typically at a fraction of their initial investment.
Many ETNs are also leveraged, meaning that both gains and losses are amplified 2 and 3 times the market movement. Some ETN products pile investing strategies on top of each other, multiplying both complexity and risk. Industry watchdogs call it “investing on steroids”. Experienced investors call it gambling at the casino.
Despite the opportunity for gains, most professional money managers and large asset managers rarely buy these products citing their complexity, mixed results, and high fees. This begs the question: Why are retail investors buying them?
The combination of high risk and highly leveraged assets spelled disaster for investors during the March 2020 market crash. Many ETNs were taken off the market, essentially losing everything. Others that have survived have still seen losses of 20% to 40%+ compared to the S&P 500’s 5.4% for example.
After these historic losses, more and more investment professionals are speaking out against leveraged ETNs for the average investor and they have regulators on their side: In 2012, banks were sanctioned for failing to educate investors about the risks of leveraged ETFs. Some firms have stopped selling leveraged and inverse notes to clients altogether. Others are facing lawsuits from clients who have clocked millions of dollars in losses.
If you are an average retail investor who lost money in risky investment vehicles such as leveraged ETNs and ETFs, you may have a case against your broker or brokerage firm. UBS, Citigroup, Wells Fargo, JPMorgan Chase & Co. all offer structured products to individual investors that may not be appropriate for them. Contact the Law Office of Jared A. Rose to find out if we can help you recover losses due to stockbroker or brokerage firm misconduct.