Exchange-Traded Products (ETPs)

Exchange-traded products (ETPs) are a kind of security that tracks financial instruments, such as an index fund or underlying securities. Like stocks, ETPs trade on exchanges. The price of an exchange-traded product, which does fluctuate, comes from the investments that it tracks. An exchange-traded product can hold anywhere from a few underlying investments to hundreds of them.

Three Kinds of ETPs

• Exchange-Traded Funds (ETFs): An ETF will hold a basket of securities. It usually follows the S&P 500 or another underlying index. It can also track a sector, an industry, a currency, or commodities.
• Exchange-Traded Notes (ETNs): An ETN contains a basket of unsecured debt securities. This type of exchange-traded product also tracks an underlying index of securities.
• Exchange-Traded Commodities (ETCs): This kind of exchange-traded product tracks either a single commodity or a basket of them. An ETC gives traders and investors exposure to derivatives or spot commodities markets that can include energy, metals, or livestock. Exchange-traded commodities are debt instrument notes. The commodities they track are the note’s collateral. An ETC’s price is affected by its underlying commodities.

An inverse exchange-traded commodity can move up when a commodity does the opposite. Leveraged ETCs can lead to twice or thrice the volatility of the underlying commodity. Leverage can enhance both the possible gains and losses for investors. Exchange-traded commodities are not commodity ETFs, which invest directly in physical commodities.

Shepherd Smith Edwards and Kantas (SSEK Law Firm at investorlawyers.com) represents investors throughout the United States in recouping losses related to exchange-traded products caused by the negligence or misconduct of firms and their financial advisors. Contact (800) 259-9010 to schedule your free case assessment with a knowledgeable ETP investment attorney today.

Considered a flexible, lower-cost option to mutual funds and actively-managed funds, exchange-traded products can be bought and sold during the day, trade like stocks, and have prices that fluctuate.

However, this same fluctuation of price, which can happen within a day, can expose an ETP investor to market losses. Also, because of variations in trade volume, liquidity can become negatively impacted. Other risks can be particular to the specific index that an exchange-traded product is tracking, the type of investing strategy employed—especially when leverage is involved —or the credit worthiness of the issuer.

Investing in exchange-traded products can lead to various financial charges, including your broker’s commission, as well as other fees, such as portfolio transaction fees, other trading costs, and tax-related fees. There also may be a tracking difference, which is when an exchange-traded product’s structure and cost don’t exactly track what it is underlying.

According to FINRA, exchange-traded products have grown in popularity. There are more than 1,900 ETPs available, each with its own risks.

However, many retail investors, inexperienced investors, conservative investors, retirees, and senior investors can’t handle a lot of exposure to volatility nor can they afford to pay so many fees. This is why it is important that your broker only recommend that you invest in an ETP if it is a suitable fit for your investing profile and financial goals. Unfortunately, unsuitable investment recommendations involving exchange-traded products continue to happen.

Examples of Recent FINRA Cases Against Brokerage Firms Over Exchange-Traded Products:

• May 2021: Calton & Associates was ordered to pay $472K in restitution and a $250K fine for offering non-traditional and volatility-linked exchange-traded products to retail customers even when these were unsuitable for them. A volatility-linked ETP is usually designed to track Chicago Board Options Exchange Volatility Index (VIX) futures.
• June 2020: J.P. Morgan Securities was fined $325K and had to pay over $333,600 plus interest in customer restitution related to its sale of volatility-linked exchange-traded products that were able to happen because of supervisory deficiencies. The brokerage firm is also accused of improper due diligence in its review of these ETPs’ risk profiles and performances.
• October 2017: Wells Fargo Advisors Financial Network and Wells Fargo Clearing Services paid over $3.4M in customer restitution for unsuitably recommending volatility-linked ETPs.

Unfortunately, exchange-traded products are not always the safest investment choice for your portfolio. If you believe that you suffered financial losses as a result of the negligent actions of a broker or brokerage firm, speak with our skilled ETP investment attorneys by calling (800) 259-9010 or contact us online. Let SSEK Law Firm help you explore your legal options.