New York Securities Fraud Lawyers Blog
Investors who have been watching the recent financial news know that securities markets have become very volatile over the past month. Increased volatility in the markets makes leveraged products like Exchange Traded Funds (EFTs) and Exchange Traded Notes particularly risky for most individuals investors, as noted in a recent Wall Street Journal article published on September 4, 2015.
These securities products incorporate borrowed money (termed leverage in the securities industry), which has the effect of amplifying gains and losses tied to baskets of securities that are often concentrated in one industry or commodity.
Malecki Law has written about these products in the past, noting that broker-dealer firms such as Stifel, Nicolaus & Co., Inc. and Century Securities Associates Inc. were fined by the Financial Industry Regulatory Authority (FINRA) for making unsuitable recommendations to investors.
In another blog post, Malecki Law cited fines against Citigroup Global Markets, Inc., Morgan Stanley & Co, LLC, UBS Financial Services, and Wells Fargo Advisors, LLC for permitting recommendations of inverse and leveraged ETFs without proper supervision.
The WSJ article cited VelocityShares 3x Long Crude Oil ETN and the Direxion Daily Energy Bull 3x Shares ETF, which both track the oil industry, and the Direxion Daily Gold Miners Bull 3x Shares ETF, which tracks gold, as examples. Leveraged ETFs often have a relatively low share price, allowing easy access to markets generally accessible only to institutional investors, but the risks are often substantial.
The most notable risk of leveraged ETFs and Notes is the use of leverage, which can magnify losses. In a volatile investment environment, such as where investors find themselves these days, leverage can create extreme losses. For example, the VelocityShares ETN cited by the WSJ is down about 58% for the year, while an unleveraged related fund is only down 14%.
Another substantial risk regarding these products cited in the article involves a phenomenon called “decay,” which refers to how losses can mount when holding the product over extended periods of time. The WSJ noted that the companies that issue the ETFs note that their leveraged ETFs and Notes are generally only used by institutional investors, while VelocityShares states in the ETN’s prospectus that the product is not meant to be held for more than a day. Most individual investors do not day-trade these products, so decay is more likely to occur, which can cause more losses to the investors’ holdings.
Unfortunately, most brokers do not properly disclose the risks of leveraged exchange traded funds and note to their clients, meaning that recommendations made to purchase the products may be inappropriate. Brokers are obligated by FINRA Rules and Industry standards to provide a balanced picture of investments, and to only recommend securities that are suitable to investors, taking into consideration each investors’ investment profile.
The attorneys at Malecki Law have successfully represented many investors who lost significant money in their securities accounts as a result of unsuitable investments in leveraged exchange traded products, as well as other inappropriately recommended securities. If you believe you have suffered losses in your securities account, as a result of questionable securities recommended to you, or unscrupulous actions taken in your securities account, please contact the attorneys at Malecki Law for a free confidential consultation.