Exchange-Traded Notes: Overview

This type of investment product is a senior, unsecured debt that is underwritten by a bank and has returns that are usually tied to the performance of a particular strategy or market benchmark. Exchange-traded notes (ETNs) typically track an underlying index of securities and let investors make bets on that index’s performance. These investments trade on major exchanges and, like stocks, their prices tend to fluctuate.

ETNs are a kind of bond. However, they don’t pay interest. They will pay the return of the index it has been tracking minus a certain fee upon maturity. Unlike exchange-traded funds (ETFs), exchange-traded notes don’t grant ownership. Investors are paid the return generated by the index.

Exchange-traded notes can also be very high risk, which is why the Securities and Exchange Commission (SEC) warns inexperienced or conservative investors not to get involved with them. Unfortunately, these products continue to be recommended by brokers and financial institutions to investors who don’t have the kind of investing profile or risk tolerance level necessary for these types of products.

Shepherd Smith Edwards and Kantas (SSEK Law Firm at investorlawyers.com) represent clients who have suffered losses because their financial advisor made misrepresentations and omissions, unsuitably recommended, or overconcentrated a customer’s account in exchange-traded notes or some other exchange-traded product.

If you are one of these investors, call (800) 259-9010 to speak with one of our experienced investment fraud attorneys today.

Before an investor agrees to take on an ETN as part of their investment portfolio, they must apprise themselves of the risks these products bring. Below, is a list of some of the most common risks associated with ETNs.

• Exchange-traded notes are complex investments that are difficult to understand let alone explain to a customer.
• Whether or not an investor will get back their principal will depend on how well the underlying index performs. A drop, or not enough of a rise in the index so that all fees charged to the customer don’t end up covered, will lead to the latter getting less than what they invested when the ETN reaches maturity.
• The value of an ETN is affected by the issuer’s credit rating. If there is a credit rating downgrade, even without any negative fluctuation to the underlying index, an exchange-traded note’s value can go down.
• If there is low trading volume available, then ETN prices could trade at much higher numbers than what they are worth for those wanting to buy. They could also go for a much lower price than their actual value for those wanting to sell them.
• An investor who sells an ETN before maturity could either end up making a lot of money or suffering a huge loss.

While many ETNs do offer an accelerated redemption should an issuer call a note —this will ideally be the value of the note minus any fees —sometimes an issuer might choose to delist a note outright from national exchanges and cease any new issuance. At this point, an investor can opt to keep the note for what could be up to four decades until maturity or trade it on the over-the-counter market where they can expect wider spreads than on the exchanges.

Inverse ETNs perform counter to the security it is tracking and can be highly risky. Made with different derivatives, they are used to generate short-positions that bet on a down market. Leveraged inverse ETNs can offer up to three times the inverse return of the benchmark underlying them after fees. They can also lead up to three times the losses than non-leveraged ETNs.

In 2020, dozens of exchange-traded notes were among the many exchange-traded products that shuttered or delisted in part because of high market volatility. These included the VelocityShares Daily 2x VIX Short-Term ETN (TVIX), iPath US Treasury 10-Year Bear ETN (DTYS), iPath US Treasury Long Bond Bear ETN (DLBS), and others. For investors who weren’t able to get out before an exchange-traded note delisted, this left them with positions that were hard to liquidate and likely led to losses.

For over 30 years, our securities fraud lawyers have been fighting for investors. We are not afraid to go after even the largest firms on Wall Street to pursue our clients’ financial recovery. SSEK Law Firm represents retail investors, retirees, high-net-worth individual investors, and institutional clients. Call (800) 259-9010 today or contact us online.