Investors Warned about Exchange-Traded Notes
An Investor Alert titled Exchange-Traded Notes—Avoid Unpleasant Surprises was issued today by The Financial Industry Regulatory Authority (FINRA).
Exchange-traded notes (ETNs) are a type of debt security that trade on exchanges and promise a return linked to a market index or other benchmark. However, unlike exchange-traded funds (ETFs), ETNs do not buy or hold assets to replicate or approximate the performance of the underlying index.
Some of the indexes and investment strategies used by ETNs can be quite sophisticated and may not have much performance history. The return on an ETN generally depends on price changes if the ETN is sold prior to maturity (as with stocks or ETFs)—or on the payment, if any, of a distribution if the ETN is held to maturity (as with some other structured products).
As FINRA’s Investor Alert explains, an ETN’s closing indicative value is computed by the issuer and is distinct from an ETN’s market price, which is the price at which an ETN trades in the secondary market. Investors should understand that an ETN’s market price can deviate, sometimes significantly, from its indicative value. If the ETN is trading at a significant premium to its closing or intraday indicative value, investors might want to consider similar products that are not trading at a premium.
“ETNs are complex products and can carry a raft of risks. Investors considering ETNs should only invest if they are confident the ETN can help them meet their investment objectives and they fully understand and are comfortable with the risks,” said Gerri Walsh, FINRA’s Vice President for Investor Education.
Exchange-Traded Notes describes the specific risks associates with ETNs, including:
- Credit Risk. ETNs are unsecured debt obligations of the issuer.
- Market Risk. As an index’s value changes with market forces, so will the value of the ETN in general, which can result in a loss of principal to investors.
- Liquidity Risk. Although ETNs are exchange-traded, a trading market may not develop.
- Price-Tracking Risk. Investors should be wary of buying at a price that varies significantly from closing and intraday indicative values.
- Holding-Period Risk. Some leveraged, inverse and inverse leveraged ETNs, are designed to be short-term trading tools, and the performance of these products over long periods can differ significantly from the stated multiple of the performance (or inverse of the performance) of the underlying index or benchmark during the same period.
- Call, Early Redemption and Acceleration Risk. Some ETNs are callable at the issuer’s discretion.
- Conflicts of Interest. The issuer of the notes may engage in trading activities that are at odds with investors who hold the notes (shorting strategies, for instance).
FINRA’s new Investor Alert also contains a step-by-step checklist to help investors determine if an ETN is right for them. Click on the link to read the full ETN investor alert.
Fort Lauderdale Securities Litigation Attorney and FINRA Arbitrator
Contact Fort Lauderdale securities litigation attorney Howard N. Kahn, Esq. if you or someone you know has a securities dispute. In addition to being an experienced securities litigation attorney, Mr. Kahn also serves as a FINRA arbitrator for individual investors, brokers, and brokerage firms. You can reach him at 954-321-0176 or online.
