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Brokers and their investor clients may think they understand these investments but we at The Law Offices of Robert Wayne Pearce, P.A. are seeing and hearing otherwise. According to Attorney Pearce one widespread misconception is that they trade like open ended mutual funds; wrong, they trade like closed end funds, at a premium or discount to their actual net asset value. Many of the niche ETFs in the marketplace are very small and illiquid funds and consequently very volatile. Some ETFs and ETNs are heavily leveraged, utilize short trading strategies and invest in derivatives or hedge funds which compound the risk of loss. ETNs add credit risk of the issuers to the mix and so, the issuer due diligence is very important to an investment decision.

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ETFs have become more complex in recent years. Wall Street, in its efforts to generate more profits, has created numerous ETFs that utilize leverage and focus on narrower market sectors, which increases risk for investors. Therefore, investors considering ETFs should evaluate each ETF investment individually and not assume all ETFs are alike. Two types of ETFs that pose a significant risk to investors’ portfolios are leveraged and inverse leveraged funds. Leverage is a technique used in the financial industry to multiply investment gains by using borrowed money. If, however, an investment is generating losses, money can be lost at a multiple rate due to the amount of money owed. Leveraged ETFs seek to deliver multiples of the performance of an index by using borrowed funds. Inverse leveraged funds also use borrowed funds to achieve multiples of the opposite of the movement of an index by employing a range of investment strategies such as swaps, futures contracts, and other derivative investments. Thus, leveraged and inverse leveraged funds can lose many times their value in a single day, which could ultimately lead to significant losses for investors.

Exchange-traded notes (ETNs) are unsecured debt obligations, usually issued by a bank or other type of financial institution, that trade on an exchange. They are different from traditional bonds in many ways. For example, ETNs usually do not make any interest payments to investors. Instead, the issuer purports to pay the holder of the ETN an amount determined by the performance of the underlying index on the ETN’s maturity date – 10, 30, or in some cases even 40 years from issuance – minus any fees. ETNs trade on exchanges throughout the day at prices determined by the market, similar to stocks. ETNs do not buy or hold assets to duplicate the performance of the underlying index, and they are not registered investment companies and therefore are not subject to the same registration, disclosure, and other regulatory requirements as most ETFs or mutual funds.

For more information about ETFs and ETNs and our cases and investigations, click on the links below:

  • UBS ETRAC Exchange Traded Note Investors: How Do You Recover Your UBS ETRAC Investment Losses?
  • Investing in ETFs


The Law Offices of Robert Wayne Pearce, P.A. understands what is at stake in securities, commodities and ETF and ETN investment law matters and constantly strives to secure the most favorable possible result. Attorney Pearce provides a complete review of your case and fully explains your legal options. The firm works to ensure that you have all of the information necessary to make a sound decision before any action is taken in your case.

For dedicated representation by a law firm with substantial experience in all kinds of securities, commodities and investment disputes, contact the firm by telephone at 561-338-0037 or toll free at 800-732-2889 or via e-mail.

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Robert Wayne Pearce

Robert Wayne Pearce of The Law Offices of Robert Wayne Pearce, P.A. has been a trial attorney for more than 40 years and has helped recover over $170 million dollars for his clients. During that time, he developed a well-respected and highly accomplished legal career representing investors and brokers in disputes with one another and the government and industry regulators. To speak with Attorney Pearce, call (800) 732-2889 or Contact Us online for a FREE INITIAL CONSULTATION with Attorney Pearce about your case.

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