FINRA, the Financial Industry Regulatory Authority Inc., issued an investor alert about the risks of ETNs, exchange-traded notes, after an investigation of Credit Suisse and Barclays ETNs this year.

ETNs are often thought of as as ETFs, exchange-traded funds, but in reality, the two are very different.  ETNs are promissory notes written by banks to deliver the returns of an index, and don’t actually hold anything, whereas ETFs, hold a stocks or bonds that trade intraday on an exchange. A bank may stop issuing new shares and cause trouble for an ETNs. This can happen  because the maximum number of shares has been reached or the bank is no longer able to hedge effectively against the index.  If no new shares are issued the ETN functions like a closed-end fund and continued demand can drive shares to a premium over the net asset value.

Barclays’ iPath Dow Jones-UBS Natural Gas Total Return Sub-Index ETN (GAZ), shares were at a high of 134% of its NAV in March — meaning investors were paying more than $2 for $1 of the ETN’s exposure. It’s now at a 32% premium.

Credit Suisse VelocityShares Daily 2X VIX Short-Term ETN (TVIX) stopped issuing new shares in February. Doubled in value but when Credit Suisse Group AG resumed issuing shares in March, the ETN’s share price fell to the NAV, losing $172 million in a single day.

JPMorgan Alerian MLP Index ETN (AMJ) halted the issuing of shares last month and is now trading at a premium of nearly 1%.

Securities Lawyer, Lars K. Soreide, of Soreide Law Group, PLLC, has represented clients nationwide. If you have investment losses call for a free consultation on how to potentially recover your losses. To speak with an attorney call 888-760-6552, or visit our website at: http://www.securitieslawyer.com. 

Soreide Law Group, PLLC., representing investors nationwide.

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In a February 16th., 2012, article in InvestmentNews.com, Jason Kephart writes that John Bogle, founder of The Vanguard Group Inc., believes low-cost, passive indexes are the best way to invest — as long as they’re not offered through an exchange-traded fund.

“There’s no question that ETFs are the greatest trading innovation of the 21st century,” Mr. Bogle said today at the Bloomberg Portfolio Manager Mash-Up in New York. “But the question is, ‘Are they the greatest investment innovation?’ and the answer is ‘no.’”

Kephart writes that the ability to trade the funds intraday leads to bad decisions by investors, such as buying high and selling low, which cause them to underperform over the long run. Mr. Bogle even has qualms with the ETF providers for the influx of products, which he says makes it even more difficult for investors to pick the right fund. “There’s something like 2,000 ETFs now,” Mr. Bogle said. “That’s almost as many stocks as there are.”

John Bogle called out BlackRock Inc. for its aggressive product launches. “BlackRock is just making a muddy pool muddier,” he said. BlackRock’s ETF arm iShares offers more than 260 ETFs, seven of which were launched recently. That’s nearly 100 more than the next biggest ETF lineup. Vanguard currently offers 47 ETFs.

The InvestmentNews.com article goes on to say that Mr. Bogle does have one thing in common with BlackRock though — a bullish outlook on stocks over the next decade. He didn’t go as far as BlackRock’s chief executive Larry Fink did recently and claim that investors should be 100% in equities. He did say, however, that the case for stocks to outperform bonds over the next 10 years was “pretty simple.” Bond yields have a 90% correlation to 10-year returns, Mr. Bogle said. With bond yields at historic lows, that should translate to returns of no more than 3% or 4% over the next 10 years, he said. Stocks, meanwhile, should benefit from a strengthening U.S. economy and have returns closer to 7%, he said. “But not without a few bumps along the way.”

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In a June 20, 2011, article from Bloomberg News, it was reported that Massachusetts’ top securities regulator is suing RBC Capital Markets LLC and one of its former registered representatives over the sale of leveraged exchange-traded funds, saying they sold them to clients who didn’t understand how the investments worked.

The Massachusetts Secretary of the Commonwealth, William F. Galvin, said RBC Capital and Michael Zukowski, a former agent, used “dishonest practices” in selling the funds, according to a statement e-mailed today. Galvin is seeking restitution to Massachusetts investors, a cease and desist order, and an administrative fine.

“The point of the complaint is not that the investors lost money,” Galvin said in the statement. “The dishonesty here is that the investors, and indeed the agent soliciting their investment, did not understand the workings of these funds.”

The Bloomberg article adds Galvin said that Zukowski, who worked in the firm’s Osterville office, sold clients “non-traditional” leveraged and inverse ETFs. Leveraged ETFs use swaps or derivatives to amplify daily index returns, while the inverse funds are designed to move in the opposite direction of their benchmark. The Financial Industry Regulatory Authority warned investors and fund sellers in June 2009 that such ETFs might not be a good fit for long-term investors. Galvin opened a probe into the products in July 2009.

It was noted that RBC Capital is a subsidiary of Toronto-based Royal Bank of Canada.

Securities Attorney, Lars Soreide, of Soreide Law, PLLC, has represented clients nationwide. If you or a family member feel you have become a victim of the sale of non-traditional ETFs by broker Michael Zukowski or RBC Capital Markets, LLC, of Massachusetts, call a Securities Arbitration Lawyer for a free consultation on how to potentially recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.securitieslawyer.com.  

Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.

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